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HOW MONEY IS MADE IN 

SECURITY INVESTMENTS 



BY 

HENRY HALL 



Sixth Edition 



52 BROADWAY 

NEW YORK 

1916 






Copyright, 1916, by 
Henry Hall 



THE DE VINNE PRESS 

MAY 3 (916 
©CU428822 
"Tm5 I . 



TO 

V. H. H. 

F JUDGME 

AND ELEVATION OF CHARACTER HAVE 

BEEN A CONSTANT INSPIRATION 

TO THE AUTHOR 



CONTENTS 

CHAPTER PAGE 

i How an Investor Makes Money ..... 3 

ii A Nation of Investors . . 15 

in Kate of Interest on Investments 21 

iv Bonds 27 

v Stocks 46 

vi Economic Cycles .......... 55 

vn Fundamental Economic Factors ..... 70 

viii Government Ownership 100 

ix Prosperity, Crises and Depression .... 107 

x Course of the Stock Market since 1860 . . . 153 

xi Investment and Speculation 157 

xii Turning Points in the Market 163 

xiii Dull Days at the Stock Exchange . . . . 180 

xiv Normal Yearly Movements of Prices , 186 

xv When to Buy 196 

xvi When to Sell , 207 

xvii A Correct System in Investment and Speculation 217 

xviii Maxims of Wall Street 227 

xix Financial Terms and Phrases 231 

xx Price Eange of Leading Stocks 244 

xxi Surplus Deposits and Interest Kates . . . 262 



PEEFACE 

Previous editions of "How Money is Made in Security Invest- 
ments/' of which there have been five, have been generously received 
and warmly commended by the American public. The book ap- 
pears to have served a useful purpose. Five years having elapsed 
since the last edition, it is proper now to republish the book, care- 
fully revised and rearranged, with its historical discussions and 
statistical data freshened and brought down to date, and with new 
illustrations. The book has been considerably expanded by the 
addition of new material. 

The aim of the author has been, primarily, to supply beginners 
in investment with a practical text book, which will describe how 
money, saved by thrift, can be so shrewdly employed in securities 
as, in the course of a series of years, to amount to a competence and 
perhaps to a fortune. It has also the farther object of making 
numerous suggestions, based on long experience and an intimate 
knowledge of the history of Finance, to a great number of men, 
competent and successful specialists in their own vocations and 
almost wholly absorbed therein, who often overlook some vital cir- 
cumstances in the investment of their surplus funds in securities. 
The book aims to supply a broad and rational foundation, upon 
which farther investment study can be built. 

Many investors abhor Speculation, in the sense in which the 
term is popularly understood. Nevertheless, experience has proved 
the soundness of, and thousands of fortunes have been founded 
upon, the well established, tried and tested broad principle that "a 
good investment is a good speculation, and that, if it is not a good 
speculation, it is not even a safe investment." This is the principle 
underlying the suggestions of this work. Unless there is strong 
assurance, when a man invests, that stocks or bonds are going 
higher in market value, it is a practical certainty either that part 
of the money will be wholly lost in the investment or else so locked 

vii 



viii PREFACE 

up as not to be available for other uses for many months, and, in 
some cases, for years. The years 1905 to 1915 supplied a great 
volume of proof of this statement. 

It is as important to avoid the errors of investment as to beware 
of the pitfalls of speculation. An investor frequently buys securi- 
ties in periods of bullish enthusiasm at precisely the time when he 
should be selling everything he has. Conversely, he often sells his 
stocks or bonds in a fright exactly when every lesson from history, 
every financial consideration, should prompt him to buy. It is 
hoped that the suggestions of this book will enable the owners of 
surplus capital to correct some errors of investment and aid them 
to employ capital wisely and profitably. 

The successful investor, every man in fact who wishes to add a 
desirable increment to his fortune from time to time, and to con- 
duct his private business operations successfully, takes advantage 
of and bases his actions upon Economic Cycles. The basic ideas 
upon this point are : First, that security prices and general business 
fluctuate through major and minor Cycles, mainly under the influ- 
ence of economic conditions. Second, that the best results are 
attained by making commitments with reference to said Cycles. 
Considerable space is therefore devoted in the following pages to 
the overwhelmingly important topic of Cycles. Attention will be 
given especially to the striking changes in the prices of securities, 
due to alternating periods of prosperity and depression in this 
country, and to the smaller and quite noteworthy fluctuations at 
certain seasons of the year, all of which are utilized by successful 
investors. 

Coming danger and coming prosperity (and therefore the trend 
of business and the security markets) are always foreshadowed, 
clearly and unmistakably, to the student of Finance. To one not 
conversant with the American character and the disposition of 
Americans to trust to luck and personal energy to extricate them- 
selves from trouble, when it arises, it would seem remarkable that 
the business world should have been taken by surprise by, not to 
mention minor instances, the Panic of 1907 and the great Stock 
Market boom of 1915. Students of Finance foresaw both. The 
terrible Panic of 1907 and the wonderful boom of 1915 were both 



PKEFACE ix 

predicted by the author of this book, long in advance, the Panic of 
1907 in correspondence with the President and members of the 
U. S. Senate, and both the Panic of 1907 and the boom of 1915 in 
private correspondence with his clients. When capital has been 
laboriously earned and placed at risk, either in practical business or 
in securities, it is certainly expedient that the possessors thereof 
should pay attention to those underlying forces in operation in the 
United States, which affect the safety and integrity of investments. 
They should place themselves in a position to forecast what is com- 
ing and to regulate their conduct in accordance with forecast in 
time to prevent losses. This work will indicate the vital matters, 
which should be watched, both in order to avoid loss of capital and 
to insure a consistent increment to one's means through a series of 
years. 



HOW MONEY IS MADE 



HOW AN INVESTOE MAKES MONEY 

MOST FORTUNES IN AMERICA ENHANCED BY SECURITY INVESTMENTS.— HOW 
THE THING IS DONE.— A FORTUNE AT MIDDLE AGE IS WITHIN THE REACH OF 
EVERY YOUNG MAN 

To the young man and the uninitiated, one of the most mys- 
terious of phenomena in the business world is the accumula- 
tion of magnificent fortunes by men who began life without a 
dollar. With rare and conspicuous exceptions, the men of to-day 
who live in splendid houses and own country estates and who have 
steam yachts, motor cars, art collections and practically unlimited 
means, have come up from poverty. How can such fortunes be 
made in one life-time ? Machiavelli took the ground, that no man 
could ever rise to great wealth or power, without the use of either 
force or fraud. This might have been true in his times and coun- 
try. It may be true, in these times and this country, of more than 
one man who has obtained opulence by trampling others under foot 
or by taking unfair advantage of his countrymen. But the asser- 
tion is not true of every rich man ; it is not even true of many ; and 
the life story of such men as Marshall Field, J. P. Morgan, George 
Peabody, John W. Mackay, Andrew Carnegie, Henry C. Frick, 
Charles M. Schwab, and thousands of other well-known Americans 
is a sufficient refutation of Machiavelli's heartless and immoral 
doctrine. 

But how do rich men make their money ? What formula do they 
use ? Is the way yet open to men of moderate means ? Can a young 
man, who starts in life with a clear head, an honest heart, a strong 
physique, and a willing spirit, but without a cent to his name, ever 

3 



4 MONEY MADE IN SECUEITY INVESTMENTS 

expect under present circumstances to gain such opulence as other 
men enjoy ? The answer is, certainly ; and the late J. P. Morgan, 
John D. Eockefeller and Andrew Carnegie are authority for the 
statement and they ought to know. 

The origin of great fortunes in China, India and Eussia is read- 
ily understood. Autocrats having the power of life, death and 
taxation over a multitude of subjects, have only to use that power 
with energy to accumulate the incredible wealth of a Li Hung 
Chang, a great Maharajah or a Grand Duke. In South America, 
rulers often retire with great riches as a result of practically the 
same methods. But in more stable and more civilized countries, 
where no one is subject to a tyrant and the people are free agents, 
especially in the United States, why is it that so many men can 
leave to their heirs sums of money, so vast that they could not pos- 
sibly have been derived from the profits of any ordinary vocation in 
life, no matter how great the business establishment ? 

The first glimpse as to the explanation of this mystery was af- 
forded to the author of this book in 1894-1896, when it fell to his 
lot (while Business Manager of The New York Tribune) to com- 
pile a list of the "millionaires" of the United States, a task which 
consumed a year and a half. 

The object of the compilation was, if the facts should warrant, to 
silence the Populists of Kansas, who were claiming at that time that 
"there were 30,000 'millionaires' in this republic, owning one- 
fourth of the wealth of the country, their fortunes having been 
made in occupations protected by the Tariff/' The inquiry was not 
only as to the size of American fortunes, but their origin. An im- 
mense number of bankers and other authorities in the different 
States saw no reason, then, why they should not communicate, very 
frankly, although in confidence, the information they possessed as 
to the source of the fortunes of the rich men in their vicinity. The 
investigation was extremely thorough. It disclosed the existence of 
only about 4,300 millionaires in the United States in 1896, the 
majority of whom had not made their fortunes in protected indus- 
tries. Publication of the facts silenced the Populistic contention 
effectually. 

Incidentally, another rather surprising fact was established, to 



HOW AN INVESTOR MAKES MONEY 5 

wit, that no matter whether the millionaires of 1896 were mer- 
chants, manufacturers, real estate owners, agents, lawyers or bank- 
ers, the great majority of them had added very materially to their 
capital by profitable operations in securities, not by saving merely, 
but by employment of savings to make large profits. The revela- 
tions of the millionaire list of 1896 in this respect have since been 
fully confirmed by later investigations. 

In the United States, there comes into existence, annually, a fund 
of money, available for investment in Stocks and Bonds, extremely 
large in the aggregate. This fund is in addition to, and distinct 
from, the annual increase in wealth, in lands, live stock, machinery, 
and other forms of fixed capital. It is composed of the savings and 
surplus profits of the people and of corporations. For the sake of 
an important bond house in New York, the author once engaged in 
a minute investigation as to the total amount of this annual new 
investment fund. Complete information was impossible to obtain, 
there being no official statistics on the subject. From many con- 
siderations, however, it was perfectly evident that the sum is now 
not less than a full billion dollars a year. Of this immense aggre- 
gate, one man will ^possess not more than one thousand dollars, 
which, however, is to him quite as important as the million or more, 
which is the annual surplus of a few men of great wealth. How to 
manage the whole of this new investment fund, so that no part of 
it shall be lost, so that all of it shall be saved and added to the per- 
manent estates of its possessors, and all of it made to bring an in- 
crement to fortune, is a subject worthy of careful inquiry. 

It is probably impracticable to expect that the whole of this an- 
nual new investment fund can ever be saved by everybody and be 
added to the permanent estates of all its possessors. Not only will 
much of it be locked up indefinitely in investments, which after- 
ward decline in price, subjecting the capital to the possibility of 
future loss, but much of it will actually be lost, both in securities 
and in business enterprise, and will never return to its original 
owners. On the other hand, there is no question that men thor- 
oughly versed in the Science of Investment and legitimate Specula- 
tion, have it within their power to save all they make, to lose no part 
of their new investment money, and to add steadily to capital. 



6 MONEY MADE IN SECUEITY INVESTMENTS 

Stocks and Bonds in the United States change most astonish- 
ingly, from time to time, in market value. In no other country in 
the world, in fact, do such wild fluctuations occur, in the price of 
the whole mass of securities. They are so great, that what we would 
ordinarily regard as simply a trading fluctuation would be looked 
upon in Germany and France, for instance, as almost a Panic. As 
an example of the instability of prices in the United States, it may 
be stated that the stocks, listed at the New York Stock Exchange, 
declined in market value in the Panic of 1907 at least $4,726,573,- 
000 from the high prices of 1906, leaving out of account a few 
obscure stocks which hardly ever appear in the transactions of the 
Exchange. The mass of bonds listed at the New York Exchange 
experienced a parallel decline. There was also a vast decline in the 
securities listed at the other exchanges of the United States. The 
Panic of 1907 cost the owners of stocks, to say nothing of bonds, a 
loss greater than the Civil War cost the United States. In 1909, 
the same 221 stocks in New York referred to above, had risen in 
market value at least $4,235,093,000. Bonds also recovered con- 
siderably. Those persons who were in a position to take advantage 
of these changes in prices made fortunes. 

Every young man who has saved a thousand dollars can take his 
place upon the firing line of finance and among the capitalists of 
the future, if he will depend upon some regular occupation for his 
means of support, and will spend a reasonable amount of his leisure 
time in the study of finance, the tariff and banking, and will follow 
sound and sane methods in his security investments and cultivate 
his own judgment and powers of intuition. Such a man ought 
readily to be worth a million at middle age. It may also be stated 
that the majority of men make their big money after they are fifty 
years of age. Does this seem chimerical or unreal ? Let us see, as 
we go on. 

Before passing on, however, let the writer disavow any intention 
to encourage petty speculation in stocks. His purpose is a different 
one. So far as that is concerned, however, nothing that any man 
can say will ever put an end to speculation, which is the principle 
of barter carried to the point of taking risks. Bold spirits have 
always speculated in something, from the days of primitive man — 



HOW AN INVESTOR MAKES MONEY 7 

in lands, cattle, mines, mulberry trees, tulips, potatoes, pig and 
scrap iron, gold, copper, grain, beans and whatever else has been in 
great demand at different periods in the world's history. No power 
on earth has ever been able to prevent this. The instinct to make 
money by buying something or creating something, which stands a 
chance of being sold at an advance, is deeply implanted in the hu- 
man breast; and the necessity of making money by some such 
process is so imperative to the majority of men, and there are so 
few "sure things" in life, that it would seem to be as useless to try 
and stop the taking of risks, as to seek to level a brick wall by throw- 
ing dandelions against it. 

With reference to taking risks in stocks, the great objection is 
that many persons incur them without the slightest knowledge of 
Wall Street history or methods. Their Wall Street ventures are 
unequivocal gambles. A methodical student, be he a plodder or a 
man of genius, will succeed, where others fail. With legitimate 
business as a means of livelihood, with close study of underlying 
factors, infinite patience and conservative methods, an investment 
in stocks should be profitable in nine cases out of ten. An investor 
would then be following the line of action, by which the captains of J 
finance have been able to amass riches in Wall Street. 

That the market prices of all securities were subject to serious 
variations was observed long ago. In the early part of the last cen- 
tury, bank stocks sometimes sold for 50 per cent premium. Bonds 
often sold below par. The stocks of various of the pioneer railroads 
underwent fluctuations of great violence. Some of the first railroad 
lines, especially in the West, and more particularly those which 
were fostered by Government land grants, were built while popula- 
tion was scanty and before the routes traversed could supply busi- 
ness enough to ensure dividends or even the expense of operation. 
Each railroad proved a powerful stimulus to local trade and to the 
value of lands; but the companies themselves often languished for 
years and many of them became insolvent for lack of money. The 
decline in value of the stocks of some of those roads will never be 
forgotten by men yet living. On the other hand, the bankers who 
financed, the men who managed, and the larger stockholders who 
clung to those corporations, during their years of trial and until 



8 MONEY MADE IN SECURITY INVESTMENTS 

settlement had wrought its miracles of development, discovered one 
secret of great wealth in the rise in value of their stocks when divi- 
dends had become assured. 

Even among stocks on which dividends had always been paid, 
extreme fluctuations in price have always been witnessed from year 
to year, and season to season, in response to trade conditions, the 
abundance of money and the public demand for securities. It cer- 
tainly took no observing man long to grasp the fact, that the vary- 
ing price of securities supplied an opportunity for profits much 
beyond the income to be derived from them as investments. Cool 
and far sighted men have materially added to, and made, fortunes 
in stocks, carefully bought in years of panic and depression and sold 
in later periods of prosperity. 

A few examples of fortunes, which have been made in stock in- 
vestments, will not be out of place. They are taken from the his- 
tory of the last generation. 

Commodore Yanderbilt began life as the owner of a canoe, which 
he sailed as a ferry boat from New York to Staten Island. He bor- 
rowed money to finance a steam ferry line and extended his opera- 
tions to steamboats in general. Late in life, he went into railroads 
and made the name of his family famous by buying good stocks 
when they were cheap and selling some of them afterward at an 
advance, often at almost fabulous prices. 

Moses Taylor, who had grown up in the mercantile business in 
New York, surprised even some of his business associates by dying 
worth $40,000,000, made by backing Delaware, Lackawanna & 
Western at a critical period in its affairs and after a thorough in- 
vestigation. 

The Astors owe their immense holdings by no means entirely to 
real estate. They have always been careful and shrewd buyers of 
stocks in violent declines. They are often in the stock market. 

Crocker, Huntington, Stanford and others of that group of re- 
markable men were merchants in a small way in the neighborhood 
of the California gold mines. Their fortunes were due in part to 
railroad contracts but mainly to the rise in value of the stocks 
owned by them. 

Jay Gould, one of the most daring and intellectual men Wall 



HOW AN INVESTOK MAKES MONEY 9 

Street has ever known, left more than $70,000,000 to his family, 
the bulk of which arose from the purchase of stocks in times of 
depression and their appreciation in price after he had built up the 
properties they represented. 

George Peabody derived his great wealth from stocks, bought and 
sold wisely. 

D. O. Mills, pioneer of California and banker, made the bulk of 
his fortune through the purchase of such stocks as Union Pacific, 
when selling below $10 a share, and holding them until the shares 
had attained marvelously high prices. 

E. H. Harriman, one of the most constructive geniuses Wall 
Street has ever known, began life in moderate circumstances. He 
accumulated a fortune far in excess of a hundred millions by 
shrewd and far sighted investments in railroad shares during panics 
and periods of business depression, and by carrying them through 
the stress of hard times until the corporations which they repre- 
sented had been brought, partly through his own exertions, to a 
height of great prosperity. 

It is well known that the Eothschilds founded the now huge for- 
tune of their house by the purchase of British government bonds, 
after the battle of Waterloo and before the defeat of Napoleon had 
become publicly known. 

The wealth of J. P. Morgan, a man who began life with a large 
estate, inherited from his father, and whose subsequent gains were 
in part due to commissions collected from reorganization schemes 
and bond sales, added materially to his enormous fortune by buying 
stocks when they were cheap and selling them when they were high. 

Thousands of other men, some of them not known outside of 
their immediate circles, until the Probate Court or their gifts to 
public objects revealed the extent of their possessions, acquired en- 
tire financial ease through stocks, bought when they were low and 
sold advantageously when they were high. 

What took place in that respect during the last generation is 
being also done, to-day, by a throng of men, on every side, who 
have risen from modest beginnings in trade, mines, manufactures, 
etc., and are now among the captains of finance and industry in 
these States. 



10 MONEY MADE IN SECUEITY INVESTMENTS 

Among the men who have added to their wealth by stock invest- 
ments, there are, of course, a few persons of exceptional qualities, 
who have themselves called into play the forces, which made stocks 
in general or those in which they were particularly interested, high 
or low. All the others, and that means all except one out of every 
thousand, have simply taken advantage of the situation as they 
found it. They bought stocks, when they could do so, safely and 
cheaply; and they sold, when the good times or the manipulation 
of prices by insiders had forced stocks to high figures. It is this 
policy alone which can be followed by the small investor. He can 
do little or nothing whatever to affect the price of stocks, one way 
or the other ; but he can buy them, when they are extremely low, all 
things considered, and he can sell them in boom times, at or near 
the top of a long rise. 

Now, what results can be produced in a series of years by the 
ordinary investor ? In previous editions of this book, a number of 
examples were given of what could have been accomplished by in- 
vestors, who bought their stocks outright, paying for them in full, 
starting in 1870. In order to modernize the data on this point, a 
fresh set of calculations will now be supplied, starting with 1893, 
the year of the great Panic. 

Suppose that a young man, starting in 1893 with a thousand dol- 
lars which he had earned and saved, had put it into New York Cen- 
tral stock. That was an approved and good' stock, with a great 
future, and a dividend payer. Ten shares could have been bought 
for $930. New York Central has always been an investment stock, 
slow moving in price, and very safe. If the investor, starting with 
his ten shares, had sold the stock within three or four points of the 
top of every considerable rise, and had reinvested all the money in 
New York Central somewhere near the bottom of every marked 
decline, from 1893 to 1915, he would have then been worth the sum 
of at least $60,000 ; and this would have taken care of him, all the 
rest of his life. No panic could have touched him, because his 
shares would have been fully paid for. He would not have been 
obliged to go into the market and give an order (to buy or sell) 
more than once or twice a year, as a rule. He would have learned 
by experience, when New York Central stock was too high to keep, 



HOW AN INVESTOK MAKES MONEY 11 

and conversely when it was so low that he ought to buy it. He 
would have had to be a diligent student of financial conditions in 
general and of the earnings and prospects of New York Central in 
particular. He would have received a number of dividends while 
the stock was in his name between times; and at the moments of 
reinvestment, he would always have had a little surplus cash left 
over after making his purchases. 

If, in 1893, he had put his money into Norfolk & Western, he 
would have had to pay about $960 for 160 shares of it. If he had 
sold, and bought again, as above outlined, dealing in Norfolk & 
Western alone, his holdings would have grown to about 3,660 shares 
by 1915, worth about $140,000, all the outgrowth of the original 
$960. 

Ten shares of Delaware, Lackawanna & Western, bought in 1870, 
for $1,300, would have grown to 220 shares in 1915, worth about 
$51,000. 

There were fewer stocks to choose from in 1893, than now — only 
about ninety actively traded in at the New York Stock Exchange, 
then, compared with over 350 now. It is therefore quite possible, 
that a neophyte in investment in 1893 would have put his first thou- 
sand dollars into some stock, which afterward ceased to pay a divi- 
dend for a time, or into a stock which did not pay a dividend even 
then, but which like Union Pacific had a great and certain future. 

An investor could have bought 100 shares of Atchison, Topeka & 
Santa Fe in 1893 for $1,000. By following the seasonal and other 
strong movements in the stock (and meanwhile being out of it dur- 
ing the period when an assessment was paid during the reorganiza- 
tion) he would have increased his 100 shares to something over 
7,000 shares by 1915, worth around $770,000. 

Suppose that he had gone into St. Paul, a stock with a check- 
ered career, one of the active footballs of speculation, but now a 
sedate investment. He could have bought ten shares in 1893 for 
$480, paying about $48 a share. In 1877, St. Paul was worth as 
low as $11 a share. The price rebounded from that low figure and 
in 1881 St. Paul sold as high as 129%. In 1888, dividends were 
suspended for a time. Hundreds of men have followed the for- 
tunes of St. Paul through good and evil days until the present time. 



12 MONEY MADE IN SECUKITY INVESTMENTS 

They saw the stock rise to 199% in 1906. If an investor in ten 
shares of St. Paul (bought in 1893 for $480) had sold anywhere 
near the top of the next considerable rise, and had reinvested all 
the money in the same stock anywhere near the bottom of the next 
heavy decline, and had pursued this policy consistently, he would 
have made about $185,000 by 1915. 

If our investor had chosen Union Pacific for his studies and in- 
vestment, from 1893 to the present day, he could have started with 
fifty shares costing about $850 and sold out his interests in 1915 
for something like $800,000, and this, too, without having had to 
pay the assessment when the company was reorganized in 1897. 

One of the favorites of active speculation in New York is Head- 
ing, par value $50, and thus called a half stock. Until 1915, it was 
customary at the New York Stock Exchange to quote Reading, as 
though it were a full share, par value $100. Whoever bought 100 
full shares of Reading actually bought 200 of the half shares. For 
the sake of the present statement, Reading will be considered as a 
half share, quoted at so many dollars a share. In 1893, 100 shares 
of Reading could have been easily bought for $600. The fluctua- 
tions of the stock have been wider than in the case of the old time 
investment issues. Had Reading, bought in 1893, at 100 shares for 
$600, been traded in consistently until 1915 on the principle out- 
lined above, the original investment of $600 would in 1915 have 
amounted to more than $1,500,000. 

Men, with larger capital, would have operated on a more exten- 
sive scale, and have made proportionately. 

Does it not begin to be clear how magnificent fortunes have been 
made in stocks, by many actual investors? 

Those who operate in stocks on a large scale do so, commonly, on 
a margin. Operations on a margin are, by conservative investors, 
considered speculation, pure and simple. A few words will herein- 
after be devoted to the subject of margins. Meanwhile, reference 
may be made to the fact, that if our investor had bought his stocks, 
in the foregoing instances, upon a margin of half the face value of 
the shares, he would have made twice as much money in the 22 years 
in question and would never once have been in danger. 

Now, it must be admitted, at once, that no private investor can 



HOW AN INVESTOR MAKES MONEY 13 

ever be in such close accord with the ruling spirits in the stock 
market, or have such an intimate acquaintance with underlying 
conditions, as to be able to know when the exact top of a boom has 
been reached (when he must sell), or when prices are actually scrap- 
ing on the bottom of a long decline (when he must buy) . An outsider 
can never sell at the highest or buy at the lowest, except by acci- 
dent; he will probably go in, or out, several dollars a share away 
from those extremes. He will often experience the chagrin of seeing 
his favorite stock go higher after he has sold and lower after he has 
bought. Allowance is made for that in the foregoing calculations. 

No man can expect to do better than the real insiders. It is 
perfectly understood that they begin to sell, a little at a time, on 
the way up, as the top is approached, and they begin to buy "on a 
scale down" as the market is nearing its bottom. The real point for 
an investor is to be able to tell, approximately, when the major 
swings of the market, extending over a series of months or years, 
are coming near their turning points. That is near enough for him. 

But this is the very gist of the whole matter. How shall a man 
know when to go in and when to go out of stocks? In order' to 
accomplish anything like the results referred to above, a man must 
know this and know it for himself. 

An investor has a thousand dollars to invest. He reads the daily 
newspaper for a week and he notes that stocks go up to-day. To- 
morrow, they mysteriously go down, for no reason at all that he can 
see. The end-of-the-week financial columns discuss the general 
situation; and the writers are blue or cheerful, as the case may be, 
and what they have to say is most interesting and informing. A 
very few of them are bold enough to say now and then, in their own 
phraseology, "Investors, the time has come; buy stocks as quickly 
as you can." Has any one ever known a good newspaper to advise 
anybody to sell his stocks and retire from the market ? The news- 
papers cannot do this. They can and do call attention to the fact, 
occasionally, when distribution is in progress. But this is as far as 
they have any right to go, considering what the province of a news- 
paper is. The reader has the facts and must judge for himself. 

An effort will be made in following chapters to supply an in* 
vestor with the means of forming his own judgment in this matter. 



14 MONEY MADE IN SECUEITY INVESTMENTS 

An investor may follow one of two courses. He may put all his 
eggs into one basket, and watch the basket. That is not a bad pol- 
icy, and it is the only one which may be pursued at the outset of 
the future capitalist's career. A little later, he can diversify his 
investments; and there are advantages in having three or four 
stocks, moderate amounts of each, one or two of them industrials. 
This latter class of stocks are apt to swing more violently and 
farther than the railroad securities. In case industrials are added 
to a man's investments, those stocks are preferable which make 
public reports and which supply the actual data from which the 
fortunes of the company can be followed. No need to specify. 



II 

A NATION OF INVESTORS 

OLD TIMES IN AMERICA, COMPARED WITH THE PRESENT. — AMERICAN SECURITIES 
ONCE OWNED MAINLY ABROAD. — THE CHANGE SINCE 1825 

People were strong, healthy and happy in the "good old times" 
of the forefathers of the republic, but they were not rich. The 
skies were as blue as now, the grass as green ; the streams were full 
of fish and the forests of game; the soil was fertile. It was not 
difficult to make a living; but scarcely any one owned securities 
and the commonalty knew little about them. 

Several millions of people occupied the thirteen colonies. They 
Were courageous, industrious and thrifty. But in the simple occu- 
pations of the pioneer settlers of a new continent, no great amount 
of surplus wealth could be accumulated. Lands and plantations, 
stage coaches, toll roads, sailing vessels, petty manufactures for 
local sale, retail and auction stores and inns all existed and were the 
forerunners of lines of business, in which fortunes have since been 
made. At the time, they merely afforded a subsistence to the ener- 
getic men, who devoted their lives to them. Millionaires were al- 
most unknown, while men worth several hundred thousand were 
extremely rare. General Washington was probably the only man on 
this continent in his day, who could have been rated as a millionaire. 

Securities were not unknown of course ; but there were only a few 
joint stock companies in existence and almost no corporations; and 
from the very nature of the case, stocks and bonds had little more 
than an academic interest to persons who had no money with which 
to buy them. Owners of securities were found only among a limited 
number of merchants, ship owners, and bankers in the larger cities 
and the proprietors of landed estates, North and South. 

Stocks and bonds came into vogue, gradually, after the War for 
Independence, as wealth increased and the trade and natural resources 

15 



16 MONEY MADE IN SECUEITY INVESTMENTS 

of the country were developed. Before many years had passed, the 
necessity had arisen for enterprises, which could be set on foot only 
through the aid of the united funds of many different persons or 
the resources of the State. Bonds were issued by the public au- 
thorities for the payment of debts to the soldiers and others and 
for the construction of roads. New ventures outside of the province 
of Government were carried out by organizing joint stock companies 
and corporations ; and as foreign trade had brought a great deal of 
money into the country, it was possible to secure the capital for the 
early modest enterprises mainly through leading men of the differ- 
ent localities, who took the stocks and bonds of new companies, 
largely from motives of public spirit and not because they were 
seeking desirable forms of investment for surplus funds. The first 
great stock company came into being in 1791, when Congress char- 
tered the original United States Bank. Local banks were formed 
in the leading cities, followed later by fire and marine insurance 
companies. During the twenty years next after Independence, 
Americans had become familiar with the idea of devoting a part of 
their surplus capital to the purchase of securities. 

For many years, however, it was practically impossible to float 
large issues of securities in the United States. The projectors of 
every important enterprise looked to Europe for a considerable part 
of the funds required. One of the interesting items of news in 
Niles's Register and other public prints, a century ago, was the 
quotations of American bank shares and State bonds in London, 
printed here about a month late as a rule. 

An illustration of the inability of rich Americans, a century ago, 
to absorb a large issue of even the most gilt edged security is af- 
forded by the experience of the first United States Bank, an institu- 
tion of which the country was extremely proud. Measured by the 
times, the bank was a gigantic concern. It had a capital of $10,000,- 
000, of which the Government took $2,000,000, the public $8,000,- 
000. In modern times, it is on record that one man has supplied 
$8,000,000 for a single enterprise. In 1791, the sum was too large 
for the whole of the infant republic. While it is true, as reported 
by President Washington, that the entire capital stock of the Bank 
was subscribed for in one day, the fact remains that those who thus 



A NATION OF INVESTORS 17 

became partners in the Bank took the stock in most cases as a specu- 
lation, not as an investment; and, as was expected, the bulk of it 
speedily found its way abroad. In 1809, after the Government had 
sold its interest in the Bank, an official report stated the rather sur- 
prising fact that only 7,000 shares (of $400 each) were owned by 
Americans. The remaining 18,000 shares were held in Europe, 
mostly in London. 

How little the ownership of securities interested our people in the 
early days is farther shown by the entire absence of special facilities 
for dealing in them. Bonds and stocks were bought and sold prin- 
cipally at the stores of leading merchants and auctioneers. Not 
until 1792, a year after the organization of the United States Bank, 
were steps taken which tended toward the creation of a specific mar- 
ket-place for securities. In that year, a start was made in New 
York, by an agreement between a few jobbers of stocks and bonds 
as to rates of commission. This was the germ of the New York 
Stock Exchange. In later years, dealers in securities in other cities 
organized stock exchanges of their own. There are stock exchanges 
now in Boston, Philadelphia, Pittsburgh, Chicago, Colorado 
Springs, San Francisco, Detroit, and other cities. In Boston and 
New York, there are also so-called curb markets for dealing in secu- 
rities not admitted to the big exchanges. 

After the dawn of railroad construction in 1826, investment in 
stocks and bonds began to play a distinct part in financial affairs. 
Wealth had continued to accumulate. Many persons were found in 
the cities, who had managed to save, through frugality and their 
talents as business men, dollar by dollar, sums of money not re- 
quired in the prosecution of private business. This class of persons 
became considerable buyers of the securities of the pioneer railroad 
lines and public utility corporations, which sprang up in the ? 30s 
and ? 40s. Some of these investments were profitable, with the con- 
sequence that men of means turned more and more in the direction 
of corporate securities as a proper and safe employment of surplus 
capital. Each decade of progress added to the volume of stocks and 
bonds afloat and the number of buyers of them. The process was a 
gradual one, however, and more than one generation of active busi- 
ness men had crossed the stage of affairs and disappeared, before 



18 MONEY MADE IN SECUKITY INVESTMENTS 

there was any striking increase in the transactions in securities or 
the roll of stockholders in corporations. 

From Edmund C. Stedman's "History of the New York Stock 
Exchange" it appears that in 1827, trading at New York was con- 
fined to forty-two descriptions of security issues, as follows : 

Twelve bank stocks. 

Eight public bonds. 

Nineteen fire and marine insurance companies. 

Delaware & Hudson Canal stock. 

New York Gas Light stock. 

Merchants' Exchange stock. 

In 1837, a day's trading sometimes amounted only to about 4,000 
shares. Even as late as the outbreak of the Civil War, in 1861, in 
spite of the enormous advance in wealth and enterprise, only 
twenty-two stocks were dealt in on the New York Stock Exchange, 
in more than fractional lots, sixteen of them being railroad shares. 

How remarkable is the change which has since taken place will 
appear from the fact, that in 1906, sales of stocks on that Exchange 
amounted to 289,425,000 shares, having a par value of $28,942,- 
500,000, while bonds were sold in 1909 to the value of over $1,300,- 
000,000. More than 350 descriptions of stocks are now dealt in, 
and more than 650 varieties of bonds. 

In the eighty years or so since the whistle of a locomotive was 
first heard in the States, a change has been wrought in the wealth 
of the people, the volume and value of securities afloat and the num- 
ber of investors, which is one of the marvels of the world's history. 
It is good to be an American and to have played some part in the 
betterment of conditions, which has brought about this transforma- 
tion. 

No figures are at hand, at all important, as to the actual wealth 
of the population in Washington's day. It is known, however, that 
by 1850, wealth had grown to about $7,000,000,000 and has since 
expanded to $190,000,000,000. In 1916, the country is rich and 
comfort is general, at least among the native born. Americans earn 
more, live better and save more than their forefathers did. Thou- 
sands are now capable of owning a few shares of stocK or a few 
bonds, compared with a mere handful in the year of adoption of the 



A NATION OF INVESTOKS 19 

Constitution, and there are more than 5,000 millionaires. So far 
as the people at large are concerned, one needs only to refer to the 
savings banks to gain a clue to the general diffusion of wealth— 
8,635 depositors in 1820, with total deposits of only $1,139,000, and 
more than 8,000,000 depositors now, while the average of accounts 
is thrice as large. 

In every rank of life, one now finds investors in securities, and 
the number of them grows, year by year, as the natural product of 
the thrift of a busy people, laws which give equal opportunities to 
all, an inspiring climate, bountiful harvests from our rich soils, the 
energy shown in every branch of trade and manufacture, the discov- 
eries of coal, oil and metals, the division of estates, and the oppor- 
tunities for profitable speculation. 

Here, as in older countries, in which there is entire freedom of 
thought and action, and which have risen from primitive condi- 
tions to wealth and prosperity, thousands of workmen have passed 
the stage where they often lacked bread to eat, and have saved a 
few thousand dollars and bought a few bonds or shares of stock. 
Many a village blacksmith and smart carpenter and grimy toiler in 
an iron mill is thus a^capitalist on a small scale. More than 50,000 
employes of the United States Steel Corporation alone are owners 
of stock in that concern. In New England, operatives are taking 
shares in the cotton mills. 

Farmers, who, as a class, formerly struggled under the most try- 
ing conditions for a bare maintenance, are now recruiting the ranks 
of buyers of securities. A notable circumstance is the fact that in 
the West hundreds of small banks have been organized in the last 
twenty years, an appreciable part of whose stock has been sub- 
scribed for by farmers. 

Among the millions who are under salary as managers, teachers, 
journalists, officials and clerks, or who conduct small retail stores, 
there is now an army of frugal people who seek a larger return on 
their modest accumulations than a savings bank affords and who 
are receiving from 5 to 7 per cent from stocks and bonds which they 
have bought. 

A curious instance is known, in which the chambermaids and 
serving men of a Southern city became stockholders in a local ship- 



20 MONEY MADE IN SECUKITY INVESTMENTS 

yard, started for repair of the swarm of fishing and truck boats 
owned on Chesapeake Bay. 

In the cities, a vast number of people, men and women, are own- 
ers of from five to twenty shares of bank, gas, or street railroad 
stock. So large is this throng of small investors, that many broker- 
age houses of good standing and repute make a distinct specialty 
of what is called the "odd lot" business in stocks. 

There is little need to multiply instances, since it is within the 
knowledge of every one, that investors are now to be found on every 
side among the ranks of people of moderate means, as well as among 
the men of wealth. Without dwelling further on the point, suffice 
it to say that Americans have fully learned the desirability of in- 
vestment in securities and the United States has become a nation 
of investors. 

There are no statistics as to the exact or even approximate num- 
ber of investors in America. It is doubtful if any useful object 
would be served, if the number could be known. As long as the 
assessor and tax collector flourish in the land, insurmountable diffi- 
culties will stand in the way of an accurate census of security own- 
ers, although the facts would be interesting enough. A few of the 
foremost corporations, like the Pennsylvania Railroad and the 
United States Steel concern, have taken pride in publishing the 
number of their stockholders ; but they are exceptions, and a policy 
of secrecy prevails among the majority of other stock companies. A 
few years ago, one of the New York mercantile agencies made a 
strong effort to compile the total number of stockholders in leading 
railroads but was obliged to abandon a task made impossible by of- 
ficial indifference. 

Securities issued by railroad corporations in the United States 
amount to more than 20 1 / 4 billion dollars, par value, while indus- 
trial corporations have issued several billions more. The bulk of 
these securities is owned by the people of the United States. No 
farther statement is necessary to indicate the enormous importance 
of such a study of finance, as will enable the owners of securities 
to safeguard the capital which has been invested in them. 



Ill 

EATE OF INTEREST ON INVESTMENTS 

2 PER CENT A MONTH COMMON A CENTURY AGO.— LEGAL RATES OF THE PRESENT 
DAY. — THE RETURN NOW TO BE LOOKED FOR ON MONEY AND SECURITIES 

Before passing on to consider the more important matters, to 
which these pages are devoted, a few elementary facts should 
be set forth. 

First, what rate of return on investments in bonds or stocks may 
an investor look for? When a man has saved his first thousand 
dollars, or when later he has derived some other and perhaps larger 
sum from his private business or from previous investments, what 
shall he do with and what can he get for the use of his money ? 

If he is in a business capable of extension, the natural use of sur- 
plus earnings would be an increase of facilities for carrying on his 
regular vocation, provided that the times and the laws of the coun- 
try justify an extension of the business. Goods, tools, machinery, 
buildings, ships, or working capital would be added to. In a solvent 
private business, it is held that yearly profits must be around 25 
per cent, more or less, in good years, in order that the business 
may be carried on properly in the lean years, when profits are small, 
or when, to maintain an organization and keep one's list of custom- 
ers, the owner is obliged to operate without profit or possibly at 
some loss for the time being. 

Among manufacturing corporations, yearly net profits range 
from 4 to 15 per cent, this moderate return being due to the fact 
that the percentage of profit is figured on the total capital, as repre- 
sented by the stock and bonds, the capital being inflated in most 
cases by a very large and perhaps undue issue of securities. In spe- 
cial instances, the rate of profit is larger. In 1915 and 1916, the 
manufacturers of motor cars are making from 30 to 50 per cent or 

21 



22 MONEY MADE IN SECUKITY INVESTMENTS 

more upon their capital, while iron and steel companies, which have 
been overwhelmed with war orders from Europe for munitions and 
supplies, are reported to be amassing profits equal in amount, one 
company making 100 per cent. Standard Oil has divided between 
31 and 48 per cent annually during the last ten years. Calumet & 
Hecla Mining, a copper company, pays anywhere from $10 to $100 
a year on its share capital, par value $25, on which only $12 has 
ever been paid in. But these are exceptional cases. If the capital 
stock of those concerns were as heavily watered as that of most in- 
dustrial corporations, the percentage of profit would be much 
smaller. 

But while such a return on the money invested seems tempting, 
on the face of the matter, there are many persons who do not care 
to undertake the responsibilities of private business, with its labors 
and anxieties, and others have sufficient equipment to hold their 
own against such competition as they are exposed to. With them, 
the propriety of other investments presents itself, when a sum of 
money has been saved beyond the cost of living. 

An abundance of investments can be found besides standard 
stocks and bonds. The scope of this work does not admit of con- 
sideration of them. It may be said of stocks and bonds, that they 
make smaller demands upon the time and personal attention of the 
investor than do promissory notes, rentable real estate, shares in 
shipping, special partnerships, and analogous forms of investment. 
The risk is no greater, provided that an investor is as cautious in 
one case as in the other, especially with reference to the time when 
he buys and the price he pays. The chances of selling out at a profit 
are larger. Farther, if one wishes to withdraw his capital from an 
investment in standard securities, he can do so at any time at a mo- 
ment's notice, by sale through a brokerage office or a bank, whereas 
investments of the nature of some of those mentioned above are of 
a more permanent character and cannot usually be disposed of 
quickly or to advantage. 

The income to be expected from bonds corresponds rather closely 
to the average rate of interest on commercial loans of money (four 
months or more) in New York City, the financial center of the 
country. From stocks, an investor expects an approximation to the 



EATE OF INTEREST ON INVESTMENTS 23 

legal rate of interest, and perhaps something more, in consequence 
of the greater risk in buying stocks. 

In early times, the scarcity of money made interest rates high. It 
was not at all uncommon to obtain 15 or 25 per cent upon loans or 
ready money. Wealth was limited and surplus capital extremely 
small. Supply and demand regulate rates of interest with an iron 
hand. The law is effective all over the world. In England, a few 
centuries ago, and indeed in Europe generally, until the Spaniards 
began to pour the gold and silver of Mexico and Peru into the old 
world, 10 per cent was the ruling rate of interest. Higher rates 
were paid by those who needed money badly to those who loaned it. 
In England, the growing wealth of the country gradually brought 
the ruling rate down to between 2 and 4 per cent where it stands 
to-day. If the rate for time loans goes much above 4 per cent in 
England, now, it is only because money stringency, or possibly a 
panic, threatens the commercial world. In France, a high rate of 
interest was current, until the development of industry, the enter- 
prise and the riches of the people caused it to fall to 5 per cent and 
finally to 2 and 3 per cent. In Germany and Holland, low rates 
have reigned for centuries on account of the thrift and prosperity 
of the people. 

In various of the newer sections of the United States, where con- 
ditions have been similar to those in early times in the East, high 
rates were common down to the middle of the last century. Two 
per cent a month, equal to 24 per cent a year, and even more, was 
once paid in California and other sparsely settled sections of the 
Western country. The great profits of the pioneer bankers in the 
territories and on the Pacific coast were obviously due, in part, to 
the high price which merchants and others were willing to pay for 
the use of loanable funds. A trifling incident, which affords an 
insight into the conditions of forty years ago in the West, is told by 
an Illinoisan, later a resident in New York, who was a small mer- 
chant in one of the towns of his State, when he was married. He 
was then worth $6,000; and it was agreed between his wife and 
himself, that when they were worth $10,000, he would retire from 
business. He could get 2 per cent a month for the use of his money, 
and this would yield an income of $2,400 a year. In those days, it 



24 MONEY MADE IN SECURITY INVESTMENTS 

was fashionable to be economical ; and the couple did not know what 
they could do with $2,400 a year. But Illinois settled rapidly, the 
people grew prosperous, great crops of grain brought millions of 
money into the West, and interest rates declined. The time when 
$2,400 a year could be realized on $10,000 of capital passed. Our 
Illinois merchant continued in business. 

The legal rate of interest, to-day, is 6 per cent in New England 
and the Middle States; from 5 to 8 per cent in the West and 
South. Each State has its own laws ; but nowhere is the legal rate 
over 8 per cent. 

It is true that a higher rate of interest is allowed in many of the 
States, when the parties to the loan agree upon the same by private 
contract. In the West and South, 10 and 12 per cent is the limit. 
Money never brings such rates, however, except during periods of 
great stringency and for a short time. In Massachusetts, Ehode 
Island, California, Colorado, Pennsylvania and New York, "any 
rate" is legal when agreed upon by private contract on call loans of 
$5,000 or more on collateral security. It is under this provision of 
the law, that such extravagant rates for temporary accommodation 
were seen in New York city, as 125 per cent in 1905 and 1907, 127 
per cent in October, 1896, and 186 per cent in 1890 and 1899. 

But while the rates allowed by law on commercial paper and on 
loans, secured by Stock Exchange collateral, are as stated, the great 
borrowers of money in this country can usually obtain ample sup- 
plies of capital at modest figures. The cities and States are able to 
borrow all the funds they require at an average of 3% to 4% per 
cent; and millions have been loaned to the United States govern- 
ment at 2 per cent. Railroads, manufacturers and merchants can, 
in ordinary times, borrow at 3y 2 to 5 per cent, according to their 
solvency and the amount of security given. In years of consider- 
able stringency, the commercial community which generally has to 
pay the highest rate of interest, is sometimes charged 7 or 8 per 
cent on time loans for a short period. In 1873, 24 per cent was 
charged in New York on commercial paper, and in 1893, 15 per 
cent was asked, but exceptional cases like these are not to be con- 
sidered. Rates of that character were simply due to spasms in the 
money market and were of short duration. In ordinary times, and 



EATE OF INTEREST ON INVESTMENTS 



25 



for a period of years, the ruling rate of interest on long time loans 
seldom goes far from 3% to 5 per cent for the bulk of the business, 
with an average of about 4 to perhaps 4%. This is the amount of 
return an investor can expect from safe, sound, approved security 
investments. Conservative men are even of the opinion, that securi- 
ties which pay a larger yield on the money invested are dangerous. 
The range of interest rates on commercial loans for four months 
or more in New York, since 1890, has been : 

1890 4y a 

1891 4y 2 

1892 2y 2 

1893 2y 2 

1894 2 

1895 2 

1896 3 

1897 2y 2 

1898 3 

1899 2 

1900 3 

1901 3 

1902 4 

1903 4 

1904 2 

1905 2i/o 

1906 - 4i| 

1907 4 

1908 2i/ 2 

1909 2i/ 2 

1910 3% 

1911 3% 

1912 3i/ 2 

1913 4% 

1914 3% 

1915 2% 



@ 9 Average, 5% 


@ 61/2 


' 5% 


@ 6 


1 4% 


@15 


5i/ 2 


@ 4 


3 


@ 6 


1 31/2 


@12 


1 sy 4 


@ 5 


1 3% 


@ 6 


' 3% 


@ 6 


41/2 


@ 6 


1 *% 


@ sy 2 


1 43/ 8 


@ ey 2 


5 


@ 6 


' 5% 


@ 5 


1 3y 2 


@ 6i/ 2 


4 


@ 8 


' 5% 


@ 8 


1 5% 


@ 7 


' 3% 


@ 5 


3% 


@ 514 


' 4% 


@ 4% 


1 4y 8 


@ 6 


1 4% 


@ 6% 


•' 53/ 4 


@ 6% 


' 4y 2 


@ 43/ 4 


1 31/2 



An investor will therefore look for a return of 4 per cent or a 
trifle more from money which he puts into railroad bonds, and 6 to 
8 per cent from the money which he invests in stocks. If those 
securities sell at prices which would make the yield appreciably 
larger, as they usually do in panic years, they are a purchase, as- 
suming that in the case of any particular company, the corpora- 
tion is solvent and its finances in good shape. A larger return can 
be expected on industrial investments, which ought to yield from 
8 to 9 per cent, ordinarily, to compensate the investor for the larger 
risk. Bonds are more stable in price than stocks ; and those whose 



26 MONEY MADE IN SECUEITY INVESTMENTS 

soundness is beyond question seldom fall below an investment yield 
of 4 or 4% per cent. If the companies which have issued them are 
strong, and, if for any reason, such as the prevalence of panic or 
high money, they can be bought to return anything like 5 per cent, 
they are a purchase. 

The current rate of interest on commercial paper affects the 
amount of return to be expected from security investments. In 
1896-1897, it was strongly asserted by bankers in the United States 
that money had gone permanently upon a 3 per cent basis and that 
no more than 3 per cent was to be expected from bonds. On the 
other hand, in 1914 it was asserted, at one time, with equal positive- 
ness that money had gone permanently upon a 6 per cent basis and 
that investors would pay no price for securities which did not re- 
turn at least 6 per cent. The return to be looked for varies, there- 
fore, with the times. It also varies with the cost of living. 

A discussion is now in progress among financiers and students, 
as to the probable effect of the increasing gold supply upon prices 
and rates of interest. It is the opinion of many, that such enor- 
mous additions as are now being made to the gold money of the 
world must tend, in time, to lower the rate of interest and raise the 
selling price of bonds. This position is strongly opposed by others, 
of whom Prof. Joseph F. Johnson of New York University is one, 
who maintain that gold inflation must stimulate enterprise and in- 
crease the demand for the use of money and thus maintain interest 
rates. In support of this theory, it may be stated that while the 
stock of gold in the United States has trebled since 1890, the total 
business transactions of the country have far more than trebled 
within the same period. Admitting that the use of checks and 
drafts minimizes the amount of gold required to transact a billion 
dollars' worth of business, it remains true that the aggregate busi- 
ness transactions of the United States have grown in volume more 
rapidly than the gold. While the controversy is interesting, the in- 
fluence of the flood of gold now being poured into circulation will 
obviously not be immediate and can only be made clear by the lapse 
of time. 



IV 

BONDS 

THIS CLASS OP SECURITIES DEFINED. — HOW TO JUDGE OF THE SAFETY OF A 
BOND.— MARKET PRICES OF VARIOUS ISSUES 

Bonds may be bought through any bank or brokerage house in 
any part of the United States. 

They are issued in denominations of $1,000 each, ordinarily, al- 
though bonds for $100 can sometimes be bought. They are put 
forth by railroad companies, public service and industrial corpora- 
tions, and by municipal, State and the national governments. 

A bond is evidence of a loan of money. Every issue by a corpora- 
tion is secured by a mortgage of some kind, on a portion, or all, of 
the property of the company, or on the securities of other corpora- 
tions which it owns; and this document is deposited with a trust 
company, which acts as trustee. Bonds issued under a first mort- 
gage have priority over all others ; and the interest on the whole of 
the funded debt of a corporation must always be paid ahead of any 
distribution for dividends on the stock. In case of default in pay- 
ment of the interest, holders of the bonds may foreclose the mort- 
gage and then, being in full possession of the property, they may 
reorganize the concern, the first mortgage bondholders having the 
first claim to consideration. 

The growth of the country and the necessity for additional capi- 
tal have' compelled corporations to issue several different classes of 
bonds. Junior issues are often practically as safe and sound as first 
mortgage bonds, because the original issues were not large, and 
because the property against which they are all a charge is of equal 
value to, or greater than, the total funded debt, and the company 
is perfectly solvent. 

27 



28 MONEY MADE IN SECURITY INVESTMENTS 

The different classes of bonds are as follows : 

General : A first lien on everything, not before mortgaged. 

First Mortgage : A first lien, preceding all other bonds. 

Second Mortgage : A second lien on the property, and, in reorganizations, 
seldom so well treated as first mortgage issues. 

Adjustment: Issued generally for improvements, ranking usually as a 
second mortgage. 

Prior Lien: In rank, ahead of subsequent issues; sometimes, an actual 
first mortgage because of retirement of previous issues. 

Consolidated : Bonds which supersede two or more previous issues. 

Collateral Trust : Secured by a pledge of securities. 

Eefunding: Issued in exchange for previous bonds, usually at a lower 
rate of interest. 

Convertible: Any kind of a bond, exchangeable for stock or bonds. 

Sinking Fund: Bonds, a certain number of which must be retired, an- 
nually, either by being called for payment or bought in the open market. 

Purchase Money: Issued for the purchase of new properties and com- 
monly a first mortgage thereon. 

Coupon: Principal payable to bearer. Interest coupons are detachable 
and also payable to bearer. 

Eegistered: Principal and interest payable by check to the person in 
whose name the bond is registered. 

Land Grant : Based on lands, retirable from land sales. 

Equipment: Issued for purchase of cars, locomotives, etc., and a direct 
mortgage on the equipment. In popular demand. 

Participating: Debt certificates, receiving interest at varying rates, as 
permitted by income. 

Income: Last of all in rank. Incomes must receive interest, if earned, 
before dividends are paid on the stock. 

Debenture: Not a bond. In reality, a promissory note, although the 
document itself has the form of a bond. 

Convertible bonds are a popular feature of corporate finance. The 
convertible feature is usually intended to give the bonds a specula- 
tive value. They can be exchanged for the stock of the company 
under certain conditions, which are specified in the bond. Eloquent 
testimony to at least the speculative value of convertible bonds, at 
times, is supplied by many instances on record. The Chicago, Mil- 
waukee & St. Paul, Eiver Division 1st 4s, sold as low as $700 a 
bond in 1870 but rose to $1,925 a bond in 1901. Two other St. 
Paul issues, which sold lower than par in the '70s, rose to 190 and 
196 respectively in 1901-1902. Union Pacific, 1st lien convertible 4s 
were quoted as low as 90% in 1903 and in 1906 were up to 160%. 
Inspiration Copper 1st 6s advanced from 94% in 1913 to 190 in 
1915, while the same company's debenture 6s advanced from 97 in 
1914 to 187 in 1915. Kennecott Copper convertibles sold as low as 
108 and as high as 220, in 1915. 



BONDS 29 

An investor in bonds should concern himself, first and foremost, 
with the question of safety of the investment and assurance of 
regular payment of interest. Other matters may also be taken into 
consideration, but they are subordinate to the point above referred 
to. Until the safety of principal is evident, an investor should 
never buy a bond of any kind. Safety is the corner-stone of success 
in all security transactions. If a man will begin his financial career 
with this idea firmly fixed in his mind and will always adhere to it, 
he will have learned the first grand lesson in the building of a for- 
tune and will never have cause to regret his action. If he lacks the 
facilities, or the education, which would enable him to investigate 
personally, then he should buy only under the guidance of a bond 
broker, a banking house, or a disinterested specialist in the analysis 
of intrinsic values, whose reputation is a guarantee that the securi- 
ties recommended are of the highest class. 

In the final analysis, safety of a bond depends upon the amount 
of property in good condition, owned by the company; total capi- 
talization; earnings; and priority of other liens. It follows that a 
prudent man will make an effort to keep himself fully informed 
with regard to the financial status of the corporations, with whose 
fortunes he has allied himself. Indeed, he will do well to post him- 
self before he buys. He ought to do this, some time; and there is 
no better opportunity than before he has committed himself. One 
must look before he leaps in Wall Street. 

The average capitalization of the railroads in the United States 
in 1914 (latest report) was $80,270 a mile, of which $34,416 per 
mile represents the stock and $45,854 the bonded debt. To judge 
whether a road's capitalization is moderate or excessive, it is nec- 
essary to consider the nature of the route traversed, whether the 
line was easy to build or the reverse, whether it is a single track or 
a four track line, the volume of traffic and the value and cost of ter- 
minals in great cities. Capitalizations vary from about $35,000 to 
more than $200,000 a mile. As the bonded debt is a mortgage on 
the property, its total volume should not exceed about 50 to 60 
per cent of the value of the property. 

Earnings of the different railroads of the country, for a series of 
years, and a great mass of other important data, can be found in 



30 MONEY MADE IN SECURITY INVESTMENTS 

the Manuals, which are printed by several authorities, annually, 
revised to date, and in "The Financial Review," published annually 
by The Financial Chronicle of New York city. 

Current earnings appear in the annual and other reports of all 
railroads, which are printed in the financial newspapers as rapidly 
as they appear. If an investor is not a subscriber to a sound and 
conservative financial publication, he cannot become one too soon. 
He will thus obtain all important statements of earnings in detail 
and as quickly as every other reader. In default of any other 
method of getting them, an investor can write to the secretaries of 
the corporations themselves, who will cheerfully supply them. If a 
corporation publishes no reports, if it locks up in the secrecy of its 
ledgers and vaults the facts upon which it would be justified in ask- 
ing for loans of money, the public can protect its interests only by 
letting the bonds alone. There are enough good things in the market 
to make it unnecessary for an investor to plunge blindly into the 
dangerous business of buying securities about whose value he can 
learn nothing. 

With reference to the safety of any particular railroad bond, one 
or two general rules apply. It is seldom that any two railroads 
operate under precisely the same conditions or are in exactly the 
same position as to the total volume of capitalization or the relative 
amounts of bonds and stock. If, however, earnings for a few years 
past have paid all expenses, all cost of maintenance, the taxes, inter- 
est on the funded debt and good dividends on the stock, and espe- 
cially if, in addition to all that, they yield some surplus besides, the 
bonds must be deemed a safe investment. It is held by railroad men 
and bankers that, after cost of maintenance has been deducted from 
earnings, then from 60 to 65 per cent of the profits should pay all 
fixed charges, that is to say, taxes and interest on the funded debt. 
If more than 80 per cent is required, an investor should take advice 
as to the propriety of selling his bonds and stock and going into 
some other security. When fixed charges amount to 100 per cent 
of the net profits, dividends on the stock are out of the question. 
When, as in the case of Chicago & Alton, fixed charges have 
amounted to between 125 and 250 per cent on the net profits, a 
heavy deficit is certain to accrue annually and the road is headed 



BONDS 31 

straight for financial bankruptcy and a receivership. There are a 
number of high-class and prosperous railroads in the United States, 
which require only 30 to 40 per cent of net profits to pay all fixed 
charges. 

The market value of the stock of a railroad is sometimes an ex- 
cellent guide to the value of the bonds. Large earnings and valu- 
able assets ensure a high price for the stock; and the same factors 
ensure the safety of the bonds. 

Junior issues of bonds are often tempting, because they can 
usually be bought for less money than those of a higher class. The 
net return in interest would then be larger. But, if they are 
cheaper, they may be so, because the risk is greater. The risk is a 
matter which must be considered. 

So far as safety of principal is concerned, the nearest approxima- 
tion to the ideal is afforded by bonds of the United States, a country 
which pays its debts and has a phenomenal record in this respect. 
Bonds of well governed cities and States belong in this class also. 
They are always in demand, fluctuate little in value, and can always 
be sold at a moment's notice. 

Bonds are sold by banking houses engaged in the business, on the 
basis of net yield in income. This basis is calculated on the selling 
price of the issue, the rate of interest paid, and the length of time 
it has to run. Tables have been prepared, which show at a glance 
the net return upon any bond at a particular price. When a bond is 
said to sell on a 4.1 per cent basis (or any other which may be 
named) the figure indicates the net return to be derived by an in- 
vestor, at the selling price named. 

The rate of interest paid by good city or railroad bonds is from 
3^ to 5 per cent. If a bond is thoroughly sound and pays from 5 
to 6 per cent interest, it is certain to sell at a price which will make 
the net return on the investment as above. In former times, when 
capital was scarce and rates of interest high, railroads were obliged 
to bid strongly for money ; and millions of dollars' worth of bonds 
were sold by them, bearing from 6 to 10 per cent interest. There 
are yet afloat a few hundred millions of such bonds; but they are 
being retired as rapidly as circumstances will permit, to be ex- 
changed for securities bearing a lower rate. 



32 MONEY MADE IN SECURITY INVESTMENTS 

Industrial and street railroad bonds pay from 4 to 6 per cent, 
but, if they are safe investments (which all of them are not), they 
are apt to sell at a premium, and the net return is in the vicinity of 
4 to 4% per cent. 

That a railroad bond may be dangerous is evident from the fact, 
that in every year there are about $425,000,000 of this class of obli- 
gations, which pay no interest at all. 

If a bond sells at a premium, that should not necessarily deter an 
investor from buying it. If a bond is listed on the New York Stock 
Exchange, or if it has a broad and quick market, or if it belongs to 
the class of savings bank investments, it is apt to bring a premium. 
Such bonds can be quickly disposed of, at any time, when the in- 
vestor wishes to realize on them. The speculative investor 
is apt to give much attention to bonds which do not sell at a 
premium. And it may be well to say that, when high-class, well 
seasoned and thoroughly sound investment issues sell at such a 
premium that the income yield is no more than 3 to 3% per cent, 
they should be sold by investors, especially if they have only a few 
years to run. By so doing the investor will capitalize his premium 
before there is any reduction in price as the bonds approach ma- 
turity. If the money were then put into sound bonds selling below 
par and having a longer term to run, it is held that income will 
remain unimpaired, while the investor will put himself in line for 
another addition to his principal through the future increase in 
value of the new investment. 

Men who care most for safety of principal fill their safe deposit 
boxes with gilt-edged bonds. Most of them have stocks, especially 
of the companies with whose management they are identified. But 
sound bonds, which yield 4 to 5 per cent, constitute the bulk of their 
permanent holdings. They avoid wildcat securities of every kind 
and are never found in the category of a resident of the East, who 
died ostensibly worth a million and whose estate could show se- 
curities for that amount, which were worth absolutely nothing. A 
few extremely conservative men exist, like the wealthy manufac- 
turer who sold so many millions of oil cloth to the late A. T. 
Stewart, who never buy anything except bonds and who never sell a 
good one, even if it has advanced $100 or $200 in value. The 



BONDS 33 

estates which are left to women and the surplus funds of savings 
banks and insurance companies are largely invested in this class of 
gilt-edged securities. These examples embody the best judgment of 
the most competent men in the field of finance, on the point of 
safety of capital and certainty of income. 

The highest class of investment securities are beyond doubt those 
which the laws of the State of New York allow savings banks to 
purchase. They are divided into three classes. In substance, they 
are as follows : 

Bonds of cities of not less than 45,000 inhabitants, which have been in- 
corporated for twenty-five years, and have never defaulted on the interest or 
on the principal of their debts for more than 90 days at any time, said cities 
to be located in States, which were admitted to the Union prior to 1896 and 
have never defaulted on the interest or principal of their State debts since 
1860. 

Bonds and mortgages on real estate, unincumbered, to the amount of not 
more than 60 per cent of the value of the property. 

First mortgage bonds of railroads lying mainly within the State or con- 
nected with and controlled by such railroads, provided that there has been 
no default on principal or interest of their bonded debts within five years 
of the investment, and provided also that at least 4 per cent in dividends 
has been paid on all the outstanding stock within the same five years. New 
York also allows savings banks to buy the first mortgage bonds of certain 
other railroads, under certain conditions, viz: Boston & Maine; Chicago & 
Northwestern; Chicago, Burlington & Quincy; Chicago, Milwaukee & St. 
Paul; Chicago & Alton; Delaware & Hudson; Delaware, Lackawanna & 
Western; Michigan Central; Maine Central; Illinois Central; Pennsylvania; 
Morris & Essex; New York, New Haven & Hartford; United Eailroads of 
New Jersey. 

This is, in main, the law; but there are a number of minor pro- 
visions and an investor who wishes to be fully informed as to all 
details should obtain a copy of it for examination. 

Low interest bearing bonds are, in 191 6, no longer favored by the 
investment world, unless their market value is so low as to make 
the income yield average 4 to 4% per cent. There are now out- 
standing in the United States about $1,000,000,000 of Sy 2 per cent 
railroad bonds. The sounder ones sell around 90 normally; others 
from 60 to 70. A sound 4 per cent bond sells for $800 to $950 per 
bond, normally. A 5 per cent will cost the investor from $900 to 
$1,050, normally. Prices go above or below these figures in extreme 
bull or bear markets, and in accordance with monetary conditions. 
Any bond, having a long time to run, selling much under the prices 



34 MONEY MADE IN SECURITY INVESTMENTS 

above quoted, is of doubtful security. As they approach maturity, 
all bonds tend to decline to par. 

An example of a first class bond is afforded by Central of New 
Jersey, general mortgage 5s. In the crash of 1907, they never sold 
below $1,130 and they have since gone to $1,300. During the last 
five years, 65 per cent of the earnings has paid all expenses and 
fixed charges and left from 8 to 10 per cent or more for the stock. 

On the other hand, the St. Louis & San Francisco general lien 5s 
sold in 1915 as low as 63y 2 (once 98%) . The earnings of the com- 
pany did not even fully meet the interest on the funded debt. 

Changes in the market prices of the highest class of purely in- 
vestment bonds afford small opportunity for speculative profits. 
They all do fluctuate in price, however, with the times and under- 
lying conditions. No securities are proof against monetary strin- 
gency, panics, and long depression; and all are subject to the 
inspiring and lifting influence of prosperity and a lively demand for 
investments. Abnormally high rates of interest on money depress 
the value of bonds for the time being and a prolonged bear cam- 
paign in stocks has the same effect. Excellent bargains in bonds 
can be found in such periods. An investor needs to be alert at such 
times, if he has money standing idle. He must reason that, in order 
to make his principal perfectly safe, the bonds he buys must have a 
good chance of appreciation in value at some later period. Cer- 
tainly, he should not buy when the signs point to lower prices. 

Men who have only a little money to invest and who are absorbed 
in the management of a private business can give little attention to 
the monthly changes in the prices of bonds and ought not to try to 
speculate in them. A class of well-to-do men exists, however, who 
have the time and a liking for such matters, and who have consider- 
able experience and a knowledge of financial matters; and they 
make a specialty of buying broad trading bonds, even if not of the 
highest grade, whenever there is a smash in the stock market or 
when extremely high rates of interest prevail. They reason that if 
the bonds go lower, they can be retained as investments, whereas 
when the bond market rallies, as it is certain to do in time, the se- 
curities can be sold at an advance larger than the percentage of 
interest which has meanwhile accrued. In this way, while dealing 



BONDS 35 

in the class of securities which best safeguards their principal, they 
add something to their capital. 

From 1893 to 1905, Missouri, Kansas & Texas, 1st gold 4s, rose 
from $690 to about $1,040 ; and Texas & Pacific, 1st gold 5s, ad- 
vanced from $590 to $1,250 or more. United States Steel, 5s, sold 
as low as 65 in 1903 and have since risen above par. 

In the terrible financial reaction of 1907, many bonds fell from 
twenty to forty points or more (between $200 and more than $400) 
and supplied excellent chances for profitable investment. Among 
them were : 

American Tobacco, 6s, 1944 

Atchison, conv. g. 5s, 1955 

Brooklyn Eapid Transit, 5s, 1945 

Central of Georgia, 1st pref. inc. 5s, 1945 

Chesapeake & Ohio, 4%s, 1992 

Consolidated Gas, conv. deb. 6s, 1909 . . . 
Colorado Industrial, 1st coll. tr. 5s, 1934 

Delaware & Hudson, con. 4s, 3916 

Erie, 50 year, conv. 4s, 1953 

Lackawanna Steel, 1st 5s, 1923 

St. Louis Southwestern, consol. 4s, 1932. 

Seaboard Air Line, 4s 

Southern Pacific, coll. tr. 4s, 1949 

In 1905, nearly all bonds returned to the high values of 1902 and 
several of them went higher. After 1902, with only one rally of 
consequence in the intervening period, the broad trend of the bond 
market was steadily downward until the summer of 1915. The 
bond business had been overdone, while the persistent hostility of 
public officials at Washington and in the States had militated 
strongly against the market values of all railroad securities. In 
1915, bonds ranged lower than in the frightful panic of 1907. The 
following table exhibits the facts clearly : 

Averacre high Average low High in Low in Rally in 

in 1902 in 1907 1909 1915 1915 

Seven 3%s 103% 82% 92% 78% 84% 

Twenty 4s 101% 84% 96% 79 86% 

Four 4%s 111% 9534 107% 93% 98% 

Twenty-five 5s .. 117% 96% 111 91% 96% 

Seven 6s 130% 110% 120% 105% 107% 

It will be long before bonds return to the high prices of 1896 to 
1905. 



h, 1906 


Low, 1907 


Decline 


117 


85 


32 


104% 


80 


24% 


109 


85 


24 


99 


58 


41 


109 


87 


22 


168% 


94 


74% 


83% 


35 


48% 


112% 


88 


24% 


109 


46% 


62% 


108 % 


80 


28% 


82 


54% 


27% 


92 


59 


33 


95% 


70 


25% 



36 MONEY MADE IN SECUEITY INVESTMENTS 

There is another class of bonds, which present great attractions 
to men who are able to assume a business risk and possess the pa- 
tience to wait a series of years. These are the prior lien bonds of 
small railroad systems, which range at a low level during periods of 
depression. Some of the new and yet undistributed bond issues 
\ belong in this class of speculative bond investments. As for the 
; bonds of small railroads, there is always the chance that they may 
be taken into some one of the larger systems, and the bonds will 
receive favorable consideration in the succeeding readjustment of 
the finances. 

Eemembering always that the small investor will, if prudent, 
have nothing to do with bonds whose safety is doubtful, even then it 
remains true that he will not friry in the height of a booming mar- 
ket. Indeed, if he then has any securities which are quoted well 
above the high prices of recent years, he will do well to sell them, 
bank the money, and bide his time, until the bonds have once more 
fallen below the average of the last two or three years. He will 
then reinvest. 

As an illustration of the changes in price of bonds during any 
given year or series of years, a few of them are shown on other pages 
herein, with their highest and lowest quotations in each year since 
1892. They are representative bonds. A few are given, which have 
now gone out of existence. Such of them as have been retired or 
refunded show how a bond acts when it approaches maturity. They 
all show the long, slow deterioration in price of even the soundest 
investment issues since 1902. 

Bonds should never be bought for investment more carelessly 
than stocks. Two striking instances will bring the fact to proof. 

A financial sensation of the years 1897 to 1899, in this country, 
was the flotation of something over $200,000,000 of 3y 2 per cent 
bonds by the Vanderbilt railroads, some of them at a high premium. 
The bonds were manipulated in the market, so as to attract invest- 
ment. One issue of them sold as high as 1131/4, in 1899. The finan- 
cial world went mad at that time over the proposition, soberly 
advanced by bankers, that money had gone permanently on a 3 per 
cent basis in the United States (just as now it has an idea, that 
money has gone permanently on a 5 to 6 per cent basis). The 3~y 2 s 



BONDS 



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BONDS 41 

were eagerly taken for "investment." These Vanderbilt 3V 2 s now 
average 82. $200,000,000 of them, par value, could not be sold for 
more than $164,000,000, and probably not for that, because selling 
would depress the price. They cost their original owners consider- 
ably more than $210,000,000. When issued, they fulfilled com- 
pletely the old time idea of a gilt edged "investment/' but those 
who took them simply engaged in a wild and inconsiderate specu- 
lation. Any sane man should have known that in this great and 
growing republic, a region which had by no means attained its full 
development, money could not long remain upon a 3 or 3% per cent 
basis. As a matter of fact, interest rates shortly afterward rose 
appreciably; and the 3% per cent bonds have since then seriously 
depreciated in market value. 

In a large town in New England, a man, who enjoyed an income 
of over $100,000 a year from his business, had saved $2,000,000, 
which he proposed to "invest" where it would be absolutely safe. 
He purchased $2,000,000 worth of British consols, then considered 
the premier security of the world. It is understood that he was able 
to "invest" around par. To-day, those consols could not be sold for 
more than about a million and a half. British banks with large 
investments in consols, have in recent years been charging off from 
$100,000 to $500,000 a year, due to shrinkage in the value of that 
security. The income has of course been regularly paid. 

As a matter of general interest, the high and low prices of British 
consols in each year for 100 years past are shown in the table on 
page 42. 



42 MONEY MADE IN SECURITY INVESTMENTS 



A CENTURY OF CONSOLS 

Comparison of High and Low Prices for the Past 
Hundred Years 



Year 


High 


Low 


Year 


High 


Low 


Year 


High 


Low 


1814 


72* 


61* 


1851 


99^ 


95f 


1888 


103f 


981 


1815 


65f 


531 


1852 


102 


951 


1889 


994; 


961 


1816 


64f 


59i 


1853 


101 


90£ 


1890 


98$: 


93f 


1817 


84* 


62 


1854 


951 


85± 


1891 


971 


94f 


1818 


83 


73 


1855 


93f 


86£ 


1892 


961 


931 


1819 


79 


641 


1856 


951 


85f 


1893 


984; 


951 


1820 


704 


65f 


1857 


941 


861 


1894 


1021 


971 


1821 


78£ 


68£ 


1858 


981 


941 


1895 


1081 


1031 


1822 


83 


75| 


1859 


97| 


88i 


1896 


*1131 


1051 


1823 


85* 


72 


1860 


951 


92£ 


1897 


1131 


1101 


1824 


961 


84f 


1861 


944, 


891 


1898 


1131 


106£ 


1825 


94± 


75 


1862 


94f 


911 


1899 


1111 


97f 


1826 


84i 


731 


1863 


94 


90 


1900' 


1031 


96£ 


1827 


89* 


76f 


1864 


92 


871 


1901 


971 


91 


1828 


88f 


80i 


1865 


901 


86f 


1902 


971 


921 


1829 


944, 


85| 


1866 


90i 


84f 


1903 


93f 


891 


1830 


94£ 


771 


1867 


96f 


891 


1904 


911 


85 


1831 


84| 


741 


1868 


961 


91f 


1905 


91H 


871 


1832 


85f 


81f 


1869 


94± 


91| 


1906 


91 


85^ 


1833 


ML* 


84* 


1870 


94| 


811 


1907 


87f 


83^ 


1834 


93 


87i 


1871 


94 


91| 


1908 


88f 


83^ 


1835 


921 


89* 


1872 


93| 


911 


1909 


86 


82^ 


1836 


92± 


86f 


1873 


94 


91f 


1910 


831 


78| 


1837 


931 


871 


1874 


93f 


91* 


1911 


821 


76f 


1838 


95i 


90| 


1875 


95f 


911 


1912 


791 


721 


1839 


931 


89£ 


1876 


971 


93f 


1913 


751 


71-A- 


1840 


93i 


85£ 


1877 


97| 


93 


1914 


77^ 


691 


1841 


90i 


874. 


1878 


98 


93f 


1915 


681 


57 


1842 


95i 


88 


1879 


99f 


941 








1843 


97f 


921 


1880 


100| 


97| 








1844 


101| 


961 


1881 


103 


98£ 








1845 


lOOf 


911 


1882 


1021 


99 








1846 


97£ 


93± 


1883 


102£ 


99f 








1847 


94 


78J 


1884 


102| 


981 








1848 


90 


80 


1885 


1011 


94| 








1849 


981 


88| 


1886 


102f 


991 








1850 


98| 


94| 


1887 


103f 


991 









^Maximum price, 113J in 1896. Minimum, 47* in 1798 (French War). 



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STOCKS 

THEIR NATURE. — ADVANTAGE OF PREFERRED STOCKS. — THE NON-DIVIDEND 
PAYERS. — HOW TO JUDGE OF THEIR VALUE 

The purchase of a share of stock is an investment in the busi- 
ness, exactly as though the buyer were a partner in the enter- 
prise. He is in fact a special partner to the extent of the value of 
his holdings ; and he is not responsible for the debts of the concern 
beyond the face value of his stock. 

The stocks of most of the railroad companies and the leading 
industrial concerns have a par value of $100 a share. Perhaps fifty 
American railroads, most of them in the State of Pennsylvania, 
issue shares of $50 each; and while the majority of these lines are 
small and obscure, yet the list includes several of the great corpora- 
tions, among them the Pennsylvania, the premier railroad of the 
United States, the Reading, Lehigh Valley, and Delaware, Lacka- 
wanna & Western, and, in New York State, the Harlem and the 
Long Island. Two or three short lines have $25 shares; and 
Wyoming has a little one, with $10 shares. In the case of the 
Grand Trunk of Canada, the shares have a par value of £100 each 
or $500 in American money. 

A modern idea is to issue stocks with no par value stated in the 
certificates. Among these are Great Northern Ore, Submarine 
Boat, Kennecott Copper, Adams Express, American Express, and 
Massachusetts Lighting. 

Mining shares are usually issued in small nominal par value ; but 
such stocks were seldom listed or traded in on the New York Ex- 
change, until within the last few years. Several $5, $10, $20, $25 
and $50 mining shares are now listed at the Exchange in New York. 
In Boston, a great number of low-priced mining shares are listed. 

46 



STOCKS 47 

The $50 or half shares, as they are called, were generally quoted 
in New York until October 13, 1915, on the basis of $100 a share. 
When one bought Reading, for example, at $140, he really acquired 
two shares at $70 each. All stocks are now quoted in New York at 
dollars per share. 

Stocks of every description can be bought through any regular 
banking house or broker, whether they are traded in on the Ex- 
change or not. 

Stocks are divided into two classes, common and preferred. The 
common stocks, when the two classes are issued, are entitled to all 
the profits after fixed charges and preferred dividends are paid. 
Some of these common stocks are of very high value. Those upon 
which no dividends are paid and the chances of any dividend are 
remote, are valuable mainly for their voting power. 

Preferred stocks have the priority as to dividends and usually as 
to assets, in case of a reorganization of the company. Those of the 
railroads are as a rule non-cumulative, while most of the industrials 
have the cumulative dividend feature. That is to say, if the stock 
is a 7 per cent cumulative issue, and if the company is unable to 
pay the full 7 per cent in any year, the arrears of dividends must 
be paid in full (in cash, stock, scrip, or bonds) before the common 
stock can hope to share in any distribution of profits. It was nec- 
essary in 1905, to reorganize the United States Leather Company 
entirely, as the Central Leather Company, to provide for the 41 
per cent of arrears of dividends and finance the arrears of dividends 
on the cumulative preferred stock. It is desirable that an investor 
should acquaint himself fully as to the peculiarities of a preferred 
stock before he buys it. The non-cumulative feature is held to be 
favorable to the common stock. Different policies are in vogue as 
to preferred stocks. St. Paul has a 7 per cent non-cumulative pre- 
ferred; and after 7 per cent has been paid both on that and the 
common stock, then both classes share equally in any division of 
profits over 7 per cent. The preferred stock of the old Rock Island 
Company had a right to elect a majority of the directors. The pre- 
ferred of Interborough-Metropolitan of New York had no voting 
power, as long as dividends were paid. 

The price at which stocks can be bought is quite another matter 



48 MONEY MADE IN SECURITY INVESTMENTS 

from their par value. A good 5 per cent railroad stock is now- 
worth normally around par, that is to say, $100 a share. It sells 
above or below this price, in sympathy with earnings, assets, total 
capitalization, and the rest of the market. If earnings are first rate, 
if dividends are entirely assured, and the general market is boom- 
ing, 5 per cent railroad stocks often sell at from $110 to $130 a 
share or more. (Reading sold as high as $164 in the winter of 
1905-6.) That is more than true investment worth, because at 
$130 a 5 per cent stock pays only 3.82 per cent on the investment. 

If earnings are falling off, if depression reigns, loans bring high 
rates of interest and a bear market is annihilating fortunes, good 5 
per cent railroad stocks can sometimes be bought for $35 to $50 a 
share, as witness the prices of 1907. At those quotations, such 
stocks would yield from 10 to 14 per cent on the purchase money, 
and they are a bargain, provided always that the finances of the 
company are not impaired. 

The 5, 6, 7 and 8 per cent railroad stocks sell, in these times, 
around $100, $110, $115 to $125, and $135 to $150 a share, re- 
spectively. They soar above those prices and sink below them with 
the times and in accordance with a wide variety of technical con- 
ditions. In a bull market, they tend to go above investment value, 
and, in a prolonged bear market, much below. Formerly, when in- 
vestors expected a smaller income return from investments than in 
1916, the 5, 6, 7 and 8 per cent railroad shares sold normally at 
$125, $150, $175 and $200 respectively. 

It is assumed that an investor will confine his attention entirely 
to standard stocks, traded in at the established exchanges. In the 
multitude of shares listed on the exchange, which are the ones de- 
serving of confidence ? 

The dividend payers will naturally have the preference. It is 
not every stock which is in that fortunate class. The Inter-State 
Commerce Commission reports in 1914 show that, whereas the 
steam lines of the United States had issued a total of about $8,680,- 
759,000 of capital stock, yet on more than $3,013,686,000 of the 
aggregate there was not any annual distribution of profits. A scant 
half of the enormous total paid 4 per cent or more. Among indus- 
trials, the common stocks of a majority pay no dividends. Obvi- 



STOCKS 49 

ously, no security will attract a conservative investor, unless it 
supplies him with an income, and not even then, if the price is too 
high. 

As for the non-dividend payers, to buy them is to enter upon a 
speculation. Whatever the future of any such stocks may be, the 
novice and the man of moderate means should beware of them, ex- 
cept in rare and specific cases. If he has access to an honest and 
candid official of the company, a banker connected with the prop- 
erty or any other source of trustworthy information and is assured 
that earnings are large and a dividend will be voted at an early 
date, the purchase of such a stock while it is cheap is justifiable. 

No one can deny that a few non-dividend payers have enriched 
their holders. American Smelting, common, rose with its earnings 
from $363/4 in 1903 to $174 a share in 1906. Heading rose from 
$37y 2 in 1903 to $164 in 1906. But a man with a moderate amount 
of money to invest should resolutely turn his back on stocks which 
do not afford him a dividend from the start, unless he knows posi- 
tively that earnings are so large as to ensure dividends at an early 
date. The two stocks above referred to did not attain their later 
extremely high prices until long after they had been placed on a 
dividend basis, and gave a promise of even larger payments. 

In selecting a stock for purchase, an investor must aim to guard 
the safety of his principal, first of all, and next consider the cer- 
tainty and amount of the income. These are the vital factors. A 
man should especially avoid being swept away from the moorings 
of common sense by the bullish furor, which reigns among all 
classes of our people at intervals. It is sometimes better to buy a 
sound stock and secure a moderate income than to strive for 7 per 
cent and endanger the safety of capital. It is a saying, attributed 
to one of the Eothschilds, that a man must decide whether he would 
prefer to sleep well or eat well. If the capital be safe, even though 
the income be moderate, the investor will sleep well. If the income 
be large and enable him to eat well, he may have to spend many 
restless nights in consequence of a reduction of income and a shrink- 
age of his capital, in bad times. 

A partner in a private firm is entitled to look at the books. He 
has a right to know how much money the concern is making, or, if 



50 MONEY MADE IN SECUEITY INVESTMENTS 

the business is going backward, to know that fact aiso. No man in 
his senses would ever enter a private firm without full knowledge 
of its affairs. Why should he do so in a corporation, without similar 
knowledge ? In the case of most railroad companies, as hereinbefore 
intimated, it is perfectly easy to "look at the books," or, in other 
words, to obtain the reports of earnings, etc., for examination. A 
few of the more popular industrial companies also issue statements, 
although some of the larger ones do not. If earnings are ample, 
even in bad times, to pay all fixed charges on the funded debt, all 
taxes and cost of maintenance, and all dividends, and leave some- 
thing over for the surplus fund, the stock must be considered a safe 
investment, if bought when the price is low. 

The preferred stocks of industrial companies, and the common 
stocks of such strong concerns as American Sugar Penning are so 
excellent with respect to the income they afford, seldom less than 
about 7 per cent, that regret must be felt at the lack of regular 
reports of earnings and assets. To buy some of these stocks is to 
leap in the dark. If there could be such Stock Exchange super- 
vision as to ensure quarterly reports at least, the public would be 
benefited greatly ; and it is difficult to understand why the corpora- 
tions themselves would be injured, although it must be said that 
some of the companies consider that they would. Partly through 
the labors of the author of this book, the New York Stock Exchange 
now employs its influence to induce corporations to make at least 
quarterly reports of earnings. The railroads already make monthly 
reports and publish them promptly. 

Union Pacific once paid 10 per cent and earned more than 18 per 
cent for the common shares, while possessing assets of enormous 
value. The knowledge of this imparted a high value to the stock. 
Eeading pays 8 per cent and usually earns more than 10. Norfolk 
& Western, a rising property, now pays 6 per cent on its stock and 
often earns more than 10. United States Steel, preferred, is an- 
other example of a security paying an excellent dividend, 7 per 
cent, and earning far in excess of all charges, in good times. The 
public knowledge of these things, derived from the minute and ex- 
cellent reports of these corporations, has never proved an injury to 
the stocks. 



STOCKS 51 

It does not follow, however, because the foregoing or any other 
standard stocks are sound, that an investor should go into the mar- 
ket at the particular time when he happens to have money to invest 
and bu}^ at the prices then ruling. Men of long experience do not 
do that. They keep their money in the bank, where it is safe, or 
loan it out at interest, and wait. There is a time for all things, and 
certainly there is a time to buy and a time to sell. So far as safety 
of capital is concerned, the ideal is most nearly attained by buying 
in times of great depression, or during a panic, when stocks are 
below their actual investment worth. The margin of safety on a 
purchase is then the largest. It is no time to buy after a prolonged 
and extensive rise. A glance at the prices of leading stocks for the 
last fifteen years, on another page, should teach caution in the mat- 
ter of buying. 

Governed by the lessons of experience, the wise investor waits 
patiently until he can go in with the certainty that the prices will 
not go much farther, if any, against him, and on the other hand, 
that they are likely to recover. His capital will then be in no dan- 
ger of impairment. This is the one great lesson to be learned by an 
investor in stocks. He is liable to incur some heart-breaking experi- 
ences unless he masters it. 

As between a number of stocks, all equally solvent, and all pay- 
ing a proper income, an investor will naturally consider the future 
worth of the properties. He would do this in any of the ordinary 
transactions of business life. The margin of safety is affected by 
future worth. It is on this account that railroad stocks are gener- 
ally held to be better investments than industrial shares. The pos- 
session of coal and other mines and lands, the growth of population, 
the fertility of the soil in regions traversed by the lines, the owner- 
ship of valuable terminals in cities, the development of manufac- 
turing interests along the routes of the roads, and the improbability 
of new and serious competition, tend continually to add to the value 
of railroad properties in general. In the case of industrial con- 
cerns, the ownership of patents, the trend of the times, substitution 
of electricity for steam for motive power, control of the sources of 
supply of iron ore and oil or other raw materials, and the liability 
to disturbance through tariff or other legislation, must be considered. 



52 MONEY MADE IN SECURITY INVESTMENTS 

Future worth is the only consideration in the matter of non-divi- 
dend paying stocks. No one would buy them, even as a speculation, 
unless it were expected that the properties they represent had a 
great if distant future. Many of the common stocks of the present 
day are in the position of those of a number of railroad lines built 
in the '80s. The roads in question were constructed by men who had 
confidence in the country and looked entirely to the future for a 
proper reward upon their investments. Their common stocks, long 
worthless, rose in value with the settlement of the country; and 
some of them rank among the gilt-edged securities of to-day. Any 
one who buys such stocks would naturally do so, moderately and 
only after patient investigation, and he would resign himself to the 
"long pull." Such stocks are never to be bought unless they are 
depressed in price. The extraordinary and unprecedented boom in 
many obscure industrial common shares in the wonderful bull mar- 
ket of 1915 was due wholly to the fact, that from 20 to 50 per cent 
a year was being earned on those shares, as a result of huge war 
orders from the allies in Europe. 

Industrial stocks have come to stay. Some of them have been 
tried by times of depression, have been attacked in the courts under 
the anti-trust laws, and subjected to the strain of changes in the 
tariff laws. They have survived every adverse influence. The regu- 
larity of their dividends and the surplus profits which they have 
earned justify their rating as good investments, if bought when 
they are low. The best of the industrials, with a few striking excep- 
tions, are those which do not issue bonds. If dividends are cumula- 
tive, so much the better for the stock. The United States Steel 
stocks are in a class by themselves. This concern has issued bonds 
but has accumulated a surplus of about $150,000,000. United 
States Steel, preferred, may have to weather other storms but has 
entered the investment class of stocks, owing to its extensive control 
over beds of iron ore in this country. 

There are enough good and sound stocks in the general lists of 
the exchanges to answer all conservative investment demand. A 
prudent man will avoid those which are not listed and those which 
are new and unproved, no matter how alluring the prospectus of 
the companies. When the time comes to sell, standard stocks find a 



STOCKS 53 

prompt and satisfactory market at ruling quotations. Those not 
listed can generally be sold only at a sacrifice. 

It is sometimes asserted that it is the actual investor who runs 
the most risk. This is not a fair statement. On the contrary, it 
may truthfully be said that if an investor buys with judgment, no 
one runs less risk than he. Under the worst possible circumstances, 
the owner of a share of stock risks only the surplus profits which he 
has put into the investment. Should the company waste its assets, 
or incur a crushing loss from fire, or, for any other reason, become 
so utterly bankrupt that nothing is left for the stockholders — an 
almost unheard of case — the investor has lost merely the sum he 
paid for the stock. This would be bad enough. But, on the other 
hand, if he were speculating and carrying stocks on a margin, or if 
he were in legitimate business and affairs were going badly, he 
would risk not only such surplus profits as he has turned back into 
the business but also all, or a large part, of his remaining capital. 
Wall Street and the field of legitimate enterprise both supply a long 
list of insolvencies every year. The number now ranges between 
10,000 and 12,000 annually. In the throng, one looks in vain for 
the names of conservative actual investors in stocks. 

Men of large means do not, as a rule, buy extensively into the 
stocks of any company, unless they expect to or already take part in 
the management. An active part in the direction is, of course, en- 
tirely beyond the small investor; but when a stock is low in price, 
and it is discovered that strong men are accumulating it on a large 
scale, for any purpose, this is a sufficient guarantee that a purchase 
would be safe for any one. 

When Henry C. Frick bought so largely of Eeading, and when 
John D. Eockefeller, Jr., bought 100,000 shares of Union Pacific 
(the price being moderate in both cases) in 1904, a boom followed 
in both of those stocks; and the subsequent rise in values showed 
how safe it would have been for others to acquire Eeading and Union 
Pacific at the same time. 

H. H. Eogers was once asked by a friend, who had more courage 
than most men could have summoned for such a purpose, for a tip 
on the stock market. Mr. Eogers replied that he might let his 
friend in on a deal, then in progress in American Sugar, in which 



54 MONEY MADE IN SECURITY INVESTMENTS 

at the time they stood to lose $300,000. The friend did not buy; 
but, if he had stopped to reflect, he would have reasoned that when 
a man like H. H. Eogers had bought a large quantity of American 
Sugar stock, he would never in the world have let go of it until the 
purchase showed a profit. As a matter of fact, the stock rose in 
value and the deal was closed to the advantage of all concerned. 

In a later chapter, suggestions will be made as to the time when, 
and the circumstances under which, an investor can buy stocks, 
with the assurance that his principal will be safe and that the pur- 
chase will bring him an increment on his capital. It can do no 
harm to insist, that, unless there is reasonable expectation that a 
stock is going to rise in val lie, within a few months or a year or so, 
no one should buy it, even as an investment. 



VI 

ECONOMIC CYCLES 

DURATION OF A MINOR CYCLE, 10 TO 11 YEARS J OF A MAJOR CYCLE, APPROXI- 
MATELY 20 YEARS. — THE FOUR STAGES OF A CYCLE. — A DISCUSSION OF THEIR 
CAUSES. — SAFETY OF INVESTED CAPITAL AND THE ACQUISITION OF FORTUNE, 
DEPENDENT UPON ADAPTATION TO CYCLES 

IN human affairs, from the earliest times within the memory of 
man, there have been regularly recurring periods of great and 
general prosperity, and of great and general depression, alternately, 
in trade and manufactures. The length of time extending from 
one period to another is called a Cycle. There always have been, 
and are to-day, Cycles in trade and manufactures; Cycles of sun- 
spots; Cycles of rainfall and thus of grain production; Cycles of 
famine and plenty ; and Cycles of war and peace. The present dis- 
cussion will deal with Cycles in trade and manufactures and their 
influence upon the market price of securities. 

When economists first began to identify the existence of Cycles, 
these periods were thought to last from 50 to 75 years. Later, it 
was considered that they were approximately of only 20 years' 
duration. Confirmation of that view was apparently supplied by 
the fact that, in the United States, first class panics, followed by , 
depression in trade and manufactures, have taken place at intervals 
of about 20 years, as, for instance, in 1791, 1814, 1837, 1857, 1873, 
1893 and 1914. These periods are sometimes lengthened, sometimes 
shortened, by the efforts of man and the incidents of the times. A 
characteristic feature of these 20 year periods has always been, how-;; 
ever, that about midway in each one, there has been a halt and set- 
back in business and in securities, as in 1826, 1847-48, 1866-67, 
1884, and 1903. The 20 year Cycle is thus divided into two parts, 
generally of unequal length. And as 10 years is a long enough time 
to plan for, in business affairs, the most practical view to take is to 

55 



56 MONEY MADE IN SECUEITY INVESTMENTS 

consider Cycles as lasting approximately 10 to 11 years, each one 
of these shorter periods also having a setback about midway of its 
length. Here is a statement of the 10-year Cycles of the last 78 
years in the United States : 

1837. A first class panic, and beginning of a major Cycle of 20 years. 

1847-1848. A reaction in trade and finance and end of a 10 year period. 
A setback had taken place in 1841. 

1857. A first class panic, end of a 20 year Cycle and beginning of a new 
one. In the 10 year period, from 1847 to 1857, a setback had occurred in 
1851. 

1866-1867. End of a minor 10 year Cycle, accompanied by a panic. A 
setback, midway of this 10 year period, was an incident of 1861. 

1873. A panic of the first magnitude. Beginning of a new 20 year Cycle. 
A setback had taken place in 1871. 

1884. End of a 10 year Cycle. A moderate panic. A setback had taken 
place in 1881. 

1893. A panic of great severity. Beginning of a new 20 year Cycle. In 
1890, there had been a setback in securities and some reaction in trade. 

1903. A panic in the security markets, with a moderate recession in trade. 
End of a 10 year Cycle. There had been a halt and setback in 1896. 

1914. A panic and reaction in business. A furious setback had taken 
place in 1907, when there was a panic of terrible force. Beginning of a 
major 20 year Cycle. 

With reference to 1914, able authorities differ upon and debate 
the question whether that year or 1907 marked the end of a major 
Cycle. The principal argument against the view that a major Cycle 
ended in 1907 is the fact, that, while the financial panic was terrific, 
the business depression which ensued was very short. On the other 
hand, 1914 not only marked the completion of a 20 year period, but 
it followed a long period of liquidation in business and securities. 
The liquidation in business was abruptly ended in 1915 by the de- 
mands upon American industries, emanating from the war in 
Europe ; but the liquidation in securities continued. The author is 
inclined to the view that, in 1915, the country entered upon the 
first part of a major 20 year Cycle. 

Prof. W. S. Jevons of England cites, as dates of crises in the 
British Isles, the years of 1701, 1711, 1721, 1731-32, 1742, 1752, 
1763, 1772-73, 1783, 1804-5, 1815, 1825, 1836-37, 1847, 1857, 
1866, and 1878. These dates supply another reason for discussing 
Cycles, as of approximately 10 or 11 years' duration. 

Authorities have differed with respect to the number of stages, 
into which a Cycle should be divided. The writer has heretofore 



ECONOMIC CYCLES 57 

regarded a Cycle as properly divisible into three parts. For conve- 
nience, and because authorities are now generally agreed upon the 
matter, Cycles will herein be considered as divided into four stages. \ 

It should be noted, here, that neither the 10-11 year Cycles, nor 
the four quarters or stages into which they are divided, are always 
of precisely the same length in point of time. They are shortened 
or lengthened by incidents of the times, the enactment of tariff 
laws, the size of the food crops, wars, and others of the fundamental 
economic factors, to which more extended reference will be made 
later. 

FIEST STAGE, EECOVERY 

The first stage of a Cycle is marked by gradual recovery from pre- 
vious prostration. The pressure of liquidation and bankruptcy has 
been lifted. New courage is inspired in despairing business men 
and workmen. All persons engaged in practical pursuits perceive 
that a turn toward better things is in progress. Manufacturers, 
merchants, miners, real estate operators, and others awaken to new I 
life ; and they plan, prepare for, and begin to carry out extensions 
of their respective lines of enterprise. A distinct revival in the iron 
trade is one of the most characteristic features of the first part of 
a Cycle. A revival in iron and steel invariably leads to a revival in 
other lines ; and this is true not only in the United States but in all 
other lands and at all times. Factories are enlarged in the first 
part of a Cycle and new ones constructed. New equipment is or- 
dered from the steel mills for industrial operations and for the 
railroads. Idle labor is gradually drawn into employment. Sales- 
men are sent out in increasing numbers by merchants and bond 
houses. Merchants order larger stocks of goods. Millions of money 
have been lying idle in the banks; and that part of this hoard, 
which has been loaned out, has brought the very lowest rates of in- 
terest. The banks have been loaning money on call from 1 to 1% 
per cent; and prime commercial paper has brought no more than 
2y 2 to 3 % per cent, a circumstance which characterizes the bottom 
of every depression. The doors of the banks are now once more 
crowded with merchants, manufacturers, miners, railroad officials, 
and promoters, who desire loans in order to finance business opera- 



58 MONEY MADE IN SECURITY INVESTMENTS 



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ECONOMIC CYCLES 59 

tions upon an enlarged scale. Iron, fabricated steel, ores, copper, 
textiles and other commodities begin to advance in price. Huge 
stacks of pig metal, which have accumulated in the yards of the 
blast furnaces, begin to fade away in consequence of the greater 
activity in manufacturing. And in a general way, the whole coun- 
try enters with buoyant hopes upon a fresh era of material progress. 
Securities advance in market value, discounting, in advance, the 
larger earnings and the increased dividends which are promised; 
and a great bull speculation begins. The first stage of a 10-11 year 
Cycle lasts about 2 years. 

SECOND STAGE, PROSPERITY 

During the second stage of a 10-11 year Cycle, general business ( 
goes forward with a rush. The construction of houses and office I 
and other buildings becomes active, creating a fresh demand for ) 
structural material. Large sums of money are expended by the 
railroads for branch and main lines, bridges, elimination of grade 
crossings, new equipment, and, in these modern times, for elec- 
trification of suburban lines near the big cities. Labor is well 
employed. Every one is making money. There is a pronounced 
advance in national and private wealth. A state of plenty and con- 
tentment exists among the people. Dividends, previously suspended, 
are resumed upon many securities, while existing dividends are in 
many cases raised to a higher figure. Speculation in stocks is brisk ; 
and securities which are most favored by large earnings advance 
substantially in price. Commodities are higher. The cost of living 
rises. Labor begins to demand better compensation. This second 
stage of a Cycle lasts from 2 to 4 years, and generally ends with a 
setback in the security markets, on profit taking, and with a tem- 
porary slowing down of business enterprise and speculation in all 
lines. 

THIRD STAGE, GREATER PROSPERITY 

In the third stage of a 10-11 year Cycle, prosperity resumes its f 
sway and rises usually to a higher pitch than before. Factories 
are rushed to their full capacity. A boom in real estate, trade, 
manufactures and mines breaks out in all parts of the country. 



60 MONEY MADE IN SECURITY INVESTMENTS 

Many securities rise to new high levels, some to previously unheard- 
of prices. Speculation in stocks is at the boiling point, enthusiasm 
being favored by another crop of increases in dividends. A charac- 
teristic trait of this period is prodigality in the personal expenses 
'of the people. To use the words of Benjamin Franklin, the poor 
see with envy on every side "luxury of dress, luxury of equipage, 
luxury of the table." In modern times, rich families indulge in an 
extravagant number of motor-cars, in the richness of dress of their 
women, and in expensive entertainments. New enterprises are 
now launched in great number. The public are asked to subscribe 
for enormous issues of new securities. At this stage, the forces 
which make for reaction become pronounced. The semaphore lights 
down the line change from white to green, then to red. There 
is a renewal of the conditions which caused the last great crisis in 
finance and which will precipitate the next one. An overproduction 
of goods and securities is noted. The demands of labor and the 
strikes for higher wages begin to curtail profits. Competition be- 
tween producers of all classes becomes keen, with the inevitable 
result of lower prices for goods and farther curtailment of profits. 
Merchants cease to order large stocks of goods, in order not to be 
caught with an excessive supply on hand, which might have to be 
sold at a loss. Retrenchment becomes the order of the day. The 
banks have by this time become heavily extended as to loans; and 
they enter upon a policy of restricting accommodation to merchants, 
manufacturers, promoters and real estate operators. Interest rates 
rise. Pressure is brought to bear upon stockbrokers to induce them 
to reduce the speculative commitments of their customers. This 
leads to the selling of stocks and a long slow decline in the prices 
thereof. Trade and industry, always keenly sensitive to the course 
of the security markets and to rising rates of interest, gradually lose 
their buoyancy and become retrograde. Working forces are reduced 
in the factories and elsewhere. The number of the unemployed in- 
creases. Buying power of the people being thus curtailed, retail 
trade is more and more affected. The latter part of the third stage 
of a Cycle is one of slow liquidation, and, so far as stocks are con- 
cerned, of distribution by pools and large operators. 



ECONOMIC CYCLES 61 



FOUKTH, OE PANIC, STAGE 

The fourth and last stage of the Cycle is marked by a panic in j 
securities, general prostration in business and hard times. Liquida- , 
tion becomes acute, and there is a collapse in trade and the security I- 
markets, aided by the calling of loans by the banks. The trouble 
leads finally to the insolvency of many business firms, a number of 
speculators of all classes, and of several weak railroads, and often of 
financial institutions. The crisis invariably starts with money 
stringency and is usually precipitated by the failure of some promi- 
nent business firm or financial institution, which spreads consterna- 
tion among the over-confident. The characteristic traits of this 
period, after the panic, are a practical end to all new enterprise; 
dwindling trade; a heavy fall in the prices of securities; smaller 
earnings by corporations, merchants, miners and manufacturers; 
general retrenchment of expenses; lower wages; strikes; the dis- 
charge of surplus workmen and clerks; the closing of many fac- 
tories, together with the institution of part time in others ; a rapid 
increase in business insolvencies; and prolonged hard times for all 
classes. Beggars throng the cities and tramps the highways. Ac- 
tual starvation overtakes only too many of the unemployed. Bail- 
road traffic falls off and idle freight cars increase strikingly in 
number. Money accumulates in the banks. Interest rates are low. 
This hard-times stage of the Cycle commonly lasts 2 or 3 years. 
Another 10 or 11 year Cycle then dawns upon the country. 

WHY TEN AND TWENTY YEARS IN LENGTH 

The phenomenon of Cycles and the recurrence of great panics at 
stated intervals have attracted the attention of economists for more 
than three centuries. In Europe especially, legislators and states- 
men, with whom efficiency in government and efficiency of the 
people in business are distinctly objects of prime importance, the 
subject of Cycles has been carefully studied. An untiring search 
has been made for the causes of these great fluctuations in public 
prosperity, in order that human ingenuity might apply itself, so far 
as it is able, to removing the causes of poverty, depression and dis- 



62 MONEY MADE IN SECURITY INVESTMENTS 

tress, on the one hand, and promoting wealth and happiness on the 
other. In the United States, where a vast number of our present 
public men have little higher ambition than to be elected to office, 
and to retain office, and are in only too many cases heart-breakingly 
incompetent to legislate scientifically for the welfare of a hundred 
millions of inhabitants, the subject of Cycles and the causes of 
panics has received scant attention. And yet there is, within the 
reach of every public man, a wealth of information on the subject. 

Economists have discussed Cycles and Crises so voluminously 
that a well-stocked library could be collected, consisting entirely of 
books and magazine articles on this general topic. Even if our pub- 
lic men pay no attention to this subject, it is incumbent upon every 
man of capital to do so, as a protection to his fortune. Those who 
wish to be informed minutely, will find sufficient information in 
any public library, and should particularly consult the works of 
Prof. William Stanley Jevons, John Stuart Mill, Alexander Baring, 
Sir William Petty, Henry C. Carey, Theodore E. Burton, H. L. 
Moore, G-. W. Dean, M. Hyndman, Jules Clement, Dr. Hyde Clark, 
J. K. Rodbertus, and Charles A. Conant. Nearly 200 well known 
writers have published books on Cycles and Crises. 

Why should Cycles be of approximately the same length ? What 
is there in the heavens above or the earth beneath, in the forces of 
Nature or in the conduct of man, which should produce Cycles from 
10 to 11 years in length, with setbacks every four or five years? 
Is there a scientific basis for this phenomenon? In the United 
States, are there tangible things, which can be watched and 
observed by the generality of practical business men and owners of 
securities, to serve as a guide to the beginning, the progress, and the 
ending of a 10 or 11 year Cycle? It is practicable to supply a 
partial answer to these questions. 

FAMINE AND PLENTY 

Variations in the food supply have a bearing on the matter. Ever 
since the advent of man upon the earth, alternate periods of pros- 
perity and distress have been more or less intimately connected with 
the annual supply of food. A famous historic instance is recorded 
in the Bible, when, in the days of the Pharaohs, seven years of fat- 



ECONOMIC CYCLES 63 

ness were followed by seven years of famine. Food to eat is, and 
always has been, the most pressing necessity of man. In the most 
ancient times, periods of pnblic happiness and activity were de- 
pendent npon a bountiful production from the soil. In later times, 
when commerce between nations and good roads within an empire 
had made it possible to supply a deficiency in the annual harvest 
in one locality, by importations from another, then a partial crop 
failure did not necessarily imply an interruption to general pros- 
perity. A succession of bad years, however, has always been harm- 
ful in every well developed country and nothing less than a 
desperate public calamity in any purely agricultural empire. 

An abundance of food is mainly dependent upon the forces and 
favors of Nature. It is true that high prices for food in any one 
year naturally stimulate a larger planting for next season's supply. 
Continual growth of the population of the United States tends also 
to stimulate a larger planting with each succeeding year. But 
oftentimes, a larger planting comes to naught, because Nature with- 
holds the beneficial rains or other favors, which are essential to 
good crops. A phenomenon has been observed upon this continent, 
which coincides curiously with one peculiarity of Cycles. Three or 
four years of bountiful harvests are apt to be succeeded by several 
years, in which some one or all the crops are partial failures; and 
every few years, there are seasons of unusually small production, 
as, for instance, in 1873-74, 1881, 1890, 1893-94, 1897, 1901, 1903, 
1907, 1911, and 1913. The worst crop failures come once in 10 
or 11 years. 

Both in Europe and America, an explanation has been sought for 
these circumstances. There is nothing in meteorology, astronomy 
or seismology, which occurs at stated intervals, about 10 or 11 
years apart, except periods of maximum of sun spots. Professor 
Jevons and others have imagined that crop failures and crises have 
been due to maximum sun spots. The contention has never been 
established. Periods of maximum sun spots, according to the Naval 
Observatory at Washington, occurred in 1860, 1870, 1883, 1893, 
and 1905 (the next being due in 1916). Only one of these dates, 
1893, coincides at all closely with unusual scarcity of the food 
supply in the United States. 



64 MONEY MADE IN SECUKITY INVESTMENTS 

The maximum of these disturbances on the face of the sun seems 
to have no connection with poor returns from the soil, except in one 
respect, now to be mentioned. It is not known whether the follow- 
ing fact has ever been mentioned by others; but it may be stated, 
as a curious coincidence at least, that, with one exception (1870), 
years of maximum sun spots have indeed been years of small crops 
of cotton in the United States; and so far as 1870 was concerned, 
the following year (1871) was attended by a small crop of cotton. 
A deficient cotton crop is always a national calamity, but is not 
sufficient, of itself alone, to bring on a crisis or a prolonged halt in 
business. 

While there is no known explanation, therefore, of the actual 
cause of serious deficiency in the food crops every 10 or 11 years, 
the fact remains that serious deficiencies do occur and are always 
attended by halts, and usually by setbacks, in business and securi- 
ties. It has been observed by the United States Weather Bureau 
that, as a general rule, whenever this country is visited by three or 
four years of bountiful rains and sufficient sunshine, this condition 
is immediately followed by several seasons, when drouth is rather 
more manifest than the contrary, sometimes affecting one of the 
leading food crops, sometimes all of them. Inspection of the rec- 
ords of food production reveals the broad principle, that setbacks in 
business and securities have usually been coincident with years 
unfavorable to germination and growth, and periods of prosperity, 
with years when conditions have been favorable. Two of these 
short periods constitute a 10 or 11 year Cycle. The end of a major 
20 year Cycle is almost invariably attended with a serious shortage 
in the crops. Here seems to be a suggestion of one scientific basis 
of Cycles. 

TARIFF AND OTHEK LAWS 

Is there any other explanation? One at least can be mentioned. 
The civilization of these modern times is more highly complex than 
in former centuries, or than even as recently as the days of the 
American Revolution. Poverty to-day, prosperity to-morrow, are 
no longer exclusively due to the crops. Other great material inter- 
ests have arisen in the land to afford a subsistence to our popula- 



ECONOMIC CYCLES 



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66 MONEY MADE IN SECUEITY INVESTMENTS 

tion, foremost among which are manufactures, transportation, 
insurance and banking; and the sickness or health of any one of 
these important interests, but especially of manufactures, affects 
powerfully the general welfare and trend of the time. In the new 
world, as in the old, manufactures, transportation, insurance and 
banking are regulated by law. No man in his right mind needs to 
be told, that, in the United States, these great material interests 
become more dependent, with each passing year, upon law for their 
prosperity. 

There is one important difference between our country and the 
leading nations of Europe in this respect. In England, Germany 
and France, for instance, two business interests dominate all others, 
to wit, trade and manufactures. The economic policy of those coun- 
tries therefore remains unchanged practically from generation to 
generation. In America, our republic is neither mainly industrial 
nor mainly agricultural ; and our economic policy has been unstable 
in consequence. Every four years we elect a new President and 
Congress; and sometimes, in so doing, we overthrow a previous 
policy and institute a changed one in regard to manufactures. 
Thus, every four years, the safety of and profits upon billions of 
invested capital are placed at the mercy of the vagaries of political 
sentiment among our people. Even the prospect of the election of a 
national administration unfavorable to manufacturers invariably 
brings about a halt and depression in trade and a reaction in se- 
curities, as in 1832, 1884, 1892 and 1912, while, after a long pub- 
lic controversy, election of an administration favorable to manu- 
factures has always proved an inspiration to new enterprise and 
the beginning of a new era of prosperity, as in 1840, 1860, 1888, 
1896 and 1908. 

National elections have a singular connection with, and supply 
another partial scientific explanation of, the length and peculiarities 
of Cycles. 

With reference to railroads, here is an interest which now repre- 
sents an investment of something more than 20 billions of actual 
cash, and which affords a subsistence to about 1,700,000 employes, 
disbursing among them annually not less than 1% billions of money 
for salaries and wages, and which, besides, is the principal buyer of 



ECONOMIC CYCLES 67 

the productions of the iron and steel works of the country. During 
the last 25 years, the railroads have been made the subject of rigor- 
ous regulation under national law. By the act of February 4, 1887, 
they were placed under the supervision of an Interstate Commerce 
Commission. The Elkins law of February 19, 1903, forbade 
rebates. The Hepburn law of June 29, 1906, gave the Commerce 
Commission the added power of fixing rates, and virtually directed 
the coal roads to dispose of their coal mines. June 18, 1910, an- 
other law extended the powers of the commission; and there have 
been various other enactments, all adding to the burdens of the 
railroads. Coincidently, the Commerce Commission construed its 
vocation, and used its power, for many years, to hinder the rail- 
roads from advancing freight and passenger rates to meet increased 
expense for wages, and actually instituted a continual series of 
petty reductions of those rates. All this regulation has grown out 
of American politics. It is fortunate for the railroad interest and 
the country at large that the Commerce Commission has recently 
begun to reverse its policy toward the railroads. 

It is difficult to connect the long campaign among politicians and 
legislators for regulation of American railroads in any striking 
manner, with the course and peculiarities of the 10 or 11 year 
Cycles, down to the present date. The campaign has been too slow, 
too gradual. There has been until 1914 and 1915 no sudden re- 
versal of a previous policy, such as has upset or has inspired the 
manufacturing world on several occasions. 

The midway reactions of 1903 and 1911 and the boom of 1915 
were perhaps due, to, some extent, to Federal policies toward the 
railroads. It is the reversals of policy which bring a shock or an 
inspiration, which cause a halt and reaction in general enterprise, 
or which cause the sunshine to break suddenly through the clouds 
and start the country forward again in a new era of prosperity. 
The change of heart on the part of the Commerce Commission (and 
indeed on the part of mercantile associations and boards of trade) 
as manifested by the advance in freight rates in 1914 and 1915 will 
undoubtedly prove a potent influence for good in both the 10 or 
11 year and the 20 year Cycle, which began in 1915. Should this 
new policy be changed, and should the laws continue to oppress the 



68 MONEY MADE IN SECUKITY INVESTMENTS 

railroad interest, then each succeeding panic and period of depres- 
sion must naturally be rendered more severe, more disastrous, in 
consequence of the misfortunes of capital invested in railroads ; and 
this should be borne in mind. 



For practical purposes, those who have capital at risk either in 
business or securities need to consider Cycles as being composed of 
four periods of two to three years each, bearing in remembrance the 
fact that, in the fourth stage of the Cycle, a panic is due. 

When business enters upon a new Cycle and a new period of lively 
expansion, and when securities respond as they always do by rush- 
ing steadily upward in price, the business man need not become 
conservative, curtail his credits, and reef and furl his enterprise, 
while the owners of securities need not prepare to sell, until after 
two or three years of good times have passed. Then, preparations 
must certainly be made for the coming midway reaction. 

In the early part of the third period, business operations can again 
be expanded and securities be bought; but a more radical liquida- 
tion of business and securities always begins, and seems to be im- 
perative, after the next two or three years of good times. That is 
the broad principle. No hard and fast rule as to details can be 
supplied. They vary with each Cycle; but no man will ever be in 
serious error if he keeps in mind the broad principle here set forth, 
and will especially regard closely the operations of the great forces, 
which will form the subject of another chapter. 

No sounder and safer course can be pursued with reference to 
Investment and Speculation, and with a view to correct a tendency 
toward hasty financial action and to insure success in long-range 
operations, either in business or securities, than to begin with a 
study of Cycles and Crises. The following are a few of the good 
books which bear on that subject : 

r 'Causes of the Panic of 1893," by William Jett Lauck. 
'Commercial Crises of the Nineteenth Century," by M. Hynd- 
nan. 

^Economic Crises," by Prof. Edward D. Jones. 
''Fifty Years in Wall Street," by Henry Clews. 



ECONOMIC CYCLES 69 

"Financial Crises," by Theodore E. Burton. 

"Forty Years of American Finance," by Alexander D. Noyes. 

"How to Forecast Business and Investment Conditions," by 
Frank Crowell. 

"Investigations in Currency and Finance," by W. Stanley 'Jevons. 

"Lessons of the Financial Crisis," by the American Academy of 
Political and Social Science. 

"Overproduction and Crises," by Karl Eodbertus. 

"Principles of Economics," by Prof. Edwin R A. Seligman. 

"Business Cycles," by W. C. Mitchell. 

"Economic Cycles, Their Law and Cause," by H. L. Moore. 

"Crises LTnder the National Banking System," by 0. M. W. 
Sprague, published by the National Monetary Commission. 



YII 

FUNDAMENTAL ECONOMIC FACTORS 

MONET. — EARNINGS. THE CROPS AND BUSINESS. DOMESTIC TRADE. — FOREIGN 

COMMERCE.— TARIFF LAWS.— COMPETITION.— GOLD PRODUCTION. — MINOR FAC- 
TORS 

Next in order is the subject of Fundamental Economic Factors, 
which are to be considered with reference to their bearing upon 
the security markets, and their influence in promoting prosperity 
and depression in business. 

No human being can rise from an examination of the course of 
the Stock Market in New York, as depicted in graphic form on 
other pages of this work, or a study of financial history in this 
country, without becoming keenly conscious of the fact that tre- 
mendous agencies must have been in operation in various years to 
produce the extraordinary fluctuations in prices, exhibited in the 
diagrams, and the coincident periodical booms and depressions in 
internal commerce and manufactures. A sympathetic reader would 
actually feel that an irresistible lifting power was in operation in 
the business world and in the markets of 1864, 1880, 1901, 1904, 
1906, 1908-09 and 1915. He would also actually feel the existence 
of the alarm and vehement force, expressed in the sensational 
declines in other years. As a man of intelligence, he would wish to 
know precisely what tangible influences produced those results. 

It is certain that the great historic movements in the prices of 
securities and the periodical booms and depressions in trade and 
manufacturing have not been the result of chance, but rather of 
definite cause and effect. They were destined in time to attract the 
attention of investigators, with a view to apply the principles dis- 
covered to the prudent management of business affairs and the 
acquisition of private fortunes. Within the past forty years, this 
has been notably the case. A great deal of attention is now paid to 

70 



FUNDAMENTAL ECONOMIC FACTOES 71 

Fundamental Economic Factors by bankers, students and writers 
and by the schools of commerce and finance, connected with uni- 
versities. The object is to obtain valid data for forecasting the 
future, as far as practicable. 

The great underlying forces have always been in full operation. 
In the early days of our republic, when fortunes were limited and 
millionaires were few, little attention was paid to economic factors 
by merchants and others. Their existence began to be realized, 
however, after our Civil War, when wealth had begun to accumulate 
in the United States. They are in these modern times fully realized 
and appreciated. A thorough understanding of them is now essen- 
tial to the profitable management of all forms of business enter- 
prise, to the protection of invested capital, and the making of 
money by investment and speculation in securities. 

First, it should be borne in mind that the stock market is not 
necessarily governed by any one of the economic factors, taken by 
itself alone. It responds to the general average of these factors. 
What are the fundamental forces ? 



MONEY 

1. Supreme in importance is money, the most vital of all basic 
factors. Business and securities must follow money. No bull cam- 
paign in stocks is possible unless backed by ample supplies of bank- 
ing funds, loanable at moderate rates of interest. No boom in trade 
and manufacturing can endure for many -months after the loaning 
power of the banks is exhausted. When, for any reason, the surplus 
reserves of the banks fall to a minimum and cash holdings are se- 
riously reduced, the banks are obliged to call loans. Interest rates 
rise. Stocks must be sold to repay the loans. Securities are certain 
to decline; and the facts may actually foreshadow an approaching 
crisis in business. In any case, and at all times, the intrinsic mar- 
ket value of securities is measured by their actual or potential in- 
come yield, compared with long-time loans of money. 

The wild rise and extraordinary prices for stocks and the great 
boom in business in the Northern States of this Union, in 1864, 
were in part due to the great inflation of the currency in those 



72 MONEY MADE IN SECUKITY INVESTMENTS 

times, from a total of $207,102,477 in 1860 to $983,318,685 in 
1865. The long liquidation which followed was directly traceable 
in large measure to the steady contraction of the currency to $688,- 
597,275 in 1878. 

In 1902, when the banks had reached the limit of their ability 
to finance the speculative pools and syndicates, which had boomed 
stocks to a dizzy pinnacle of prices, and when the whole country 
was transacting a profitable business upon an enormous scale, a 
sudden halt was called on account of the practical exhaustion of 
the supply of loanable funds. The banks were compelled to call 
loans, initiating a downward movement in stocks and a halt in 
trade, which ended in the "rich man's panic" of 1903. 

In 1906, when John W. Gates, E. H. Harriman, the Standard 
Oil party, and in fact every prominent operator and speculative 
contingent was active in the stock market on the bull side, and 
when many railroad shares had reached a height never before wit- 
nessed in history, the overtaxed position of the banks again led 
them to sound the clarion call of retreat. A frightful liquidation 
and a panic of intense severity followed. 

In 1904, 1908 and 1915, a plethora of loanable funds in the 
banks of the country prepared the way and laid the strong founda- 
tion for powerful business revivals and new bull markets in securi- 
ties. 

The new Federal Eeserve system for the National Banks, which 
went into operation in 1914, increased the loaning power of the 
banks enormously by mobilizing millions of gold, formerly held as 
reserve. The Federal Eeserve law reduced the amount of reserve, 
required by law to be held against deposits, from 25 per cent in the 
principal cities to 15 per cent, and provided various safeguards 
against future panics. The first fruits of this admirable system 
were already ripening on the trees before the heavy influx of gold 
from foreign lands in 1915 added yet farther to the resources of 
the banks. 

It is not difficult to keep in touch with the condition of the Na- 
tional Banks. Five or six times a year, these institutions are called 
upon by the Comptroller of the Currency in Washington for an 
elaborate report of their deposits, loans and assets. The replies are 



FUNDAMENTAL ECONOMIC FACTOKS 73 

assembled and tabulated, and are then published in the Associated 
Press dispatches. It is important to watch for them. To read their 
reports properly, adopt the following course of procedure : 

' Loans: Add "Loans and Discounts"; "Overdrafts"; amounts "Due 
from Banks" of all kinds; "Due from reserve agents"; "Exchanges for 
Clearing House"; "Clearing House certificates," if any; and "Outside 
checks and cash items ' ' on banks in the same town. 

. Deposits: Add "Deposits," including those of public officials; "Due to 
Banks ' ' of all kinds and reserve agents ; and ' ' Dividends unpaid. ' ' 

i Net Deposits: Gross deposits, less checks on banks in the same city; less 
Exchange for Clearing House; less also amount due from Treasurer of the 
United States ; and less bills of other National Banks. 
Cash: Specie and legal tenders. 

These are the four principal items. A large circular, containing 
the facts, and with various percentages worked out, is issued by the 
Comptroller of the Currency after all returns have been received 
under each call. The circular is mailed to all the banks and to such 
other persons as desire it. 

The item of "Surplus Deposits" is of great interest in New York 
city, but is not so important a factor in the condition of the Na- 
tional Banks of the whole United States, although always interest- 
ing. The important items in the reports, made by all the banks to 
the Comptroller of the Currency, are set forth on page 74 for a pe- 
riod of years. 

In this table, note the reduction of Surplus Eeserves in 
1906, 1909 and 1912, which put an end to the booms of those years. 

Note also the actual deficit in Surplus Eeserves in 1914, due to 
heavy payments which this country was forced to make for Amer- 
ican stocks and bonds, liquidated in the New York market by 
Europe. The enormous expansion of Surplus Eeserves in 1914 
and since then, in consequence of the new Federal Eeserve system, 
is a happy augury for the future of business and securities in this 
country. The loaning power of the banks has been extravagantly 
increased. 

When, in former years, the percentage of cash to loans fell below 
12 per cent, liquidation was inevitable. When it had risen to 13 
or 14 per cent, public prosperity and a booming stock market were 
sure to ensue, barring public calamities, like war and famine. Now 
that the Federal Eeserve system has been instituted, these figures 



74 MONEY MADE IN SECURITY INVESTMENTS 



Date of 
Call 

1906. 
Jan. 29 
April 6 
June 18 
Sept. 4 
Nov. 12 

1907. 
Jan. 26 
Mar. 22 
May 20 
Aug. 22 
Dec. 3 

1908. 
Feb. 14 
May 14 
July 15 
Sept. 23 
Nov. 27 

1909. 
Feb. 5 
April 28 
June 23 
Sept. 1 
Nov. 16 

1910. 
Jan. 31 
Mar. 29 
June 30 
Sept. 1 
Nov. 10 

1911. 
Jan. 
Mar. 
June 
Sept. 
Dec. 



Loans 



Net Deposits 



Surplus 



Per cent of 

Total Reserves 

to Net 

Deposits 



Per cent of 
Loans to 

Net 
Deposits 



Per cent of 
Cash to 
Loans 



1912. 
Feb. 20 
April 18 
June 14 
Sept. 4 
Nov. 26 

1913. 
Feb. 4 
April 4 
June 4 
Aug. 9 
Oct. 21 

1914. 
Jan. 13 
Mar. 4 
June 30 
Sept. 12 
Oct. 31 
Dec. 31 

1915. 
Mar. 4 
May 1 
June 23 
Sept. 2 



$5,634,435,629 $4,783,849,294 

5,560,607,952 4,756,479,245 

5,627,119,050 4,819,177,251 

5,836,044,344 4,927,865,452 

5,973,611,640 4,969,961,040 



$73,432,181 
38,238,593 
57,668,891 
26,709,054 
37,940,008 



21.82 
21.03 
21.44 
20.70 
20.79 



117.78 11.86 

116.91 11.15 

116.77 11.57 

118.43 10.72 

120.20 10.62 



$5,828,138,395 $5,154,128,493 $73,447,759 21.53 113.08 11.93 

5,984,851,499 5,140,895,722 
6,100,040,814 5,225,122,396 
5,999,622,740 5,256,085,097 

5,882,845,438 4,906,684,057 



36,668,455 20.74 116.41 10.96 

58,365,225 21.22 116.74 11.33 

70,053,586 21.33 114.14 11.67 

67,690,452 21.31 119.90 11.23 



$5,713,110,071 
5,872,542,592 
6,016,303,484 
6,286,652,992 
6,493,704,247 

$6,452,467,473 
6,558,584,800 
6,633,573,944 
6,753,688,689 
6,846,356,424 



$5,037,945,759 
5,291,781,121 
5,464,614,058 
5,693,509,030 
5,773,532,553 

$5,898,480,527 
6,018,166,279 
6,074,508,504 
6,164,677,941 
6,046,454,658 



$6,979,630,934 $6,163,203,165 

7,083,614,363 6,320,019,497 

7,140,305,556 6,196,156,487 

7,035,920,811 6,247,266,834 

7,190,963,575 6,205,994,733 



!6,998,695,943 
7,306,540,085 
7,328,498,991 
7,330,460,043 
7,398,021,683 



56,267,870,077 
6,618,482,968 
6,689,018,801 
6,684,859,627 
6,670,804,611 



$7,666,106,014 $7,030,641,998 

7,658,327,342 6,997,244,602 

7,693,060,904 7,050,136,992 

7,847,438,625 7,093,336,534 

7,879,909,390 7,034,844,399 

$8,006,144,510 $7,277,541,033 

7,935,182,211 7,279,022,759 

7,852,875,285 7,124,634,372 

7,710,651,186 7,096,690,069 

8,121,525,868 7,172,162,887 



$169,084,751 
191,149,172 
151,602,997 
141,676,653 
109,962,725 

$115,260,902 

116,666,188 

115,815,144 

77,043,745 

70,713,136 

$80,730,536 
62,821,611 
66,875,354 
87,606,802 
73,092,336 

$86,806,848 
94,604,494 

121,370,814 
76,250,250 
63,192,394 

$97,078,637 
80,376,956 
81,676,439 
42,931,858 
31,152,932 

$64,150,535 
36,246,298 
72,775,028 
55,885,510 
52,045,357 



23.47 
23.93 
23.17 
22.97 
22.32 

22.36 
22.38 
22.37 
21.67 
21.31 

21.47 
21.21 
21.21 
21.58 
21.19 

21.40 
21.16 
22.10 
21.36 
21.05 

21.67 
21.30 
21.48 
20.69 
20.35 

20.91 
20.44 
20.95 
20.72 
20.54 



8,327,606,673 
8,194,611,066 
7,847,006,817 
7,729,584,578 
8,111,966,207 

$8,379,569,749 
8,661,858,514 
8,504,409,749 
8,818,446,691 



7,504,577,203 
7,495,149,220 
7,292,908,772 
7,167,428,909 
6,668,325,435 

$7,065,720,552 
7,197,970,661 
7,280,300,276 
7,522,977,771 



47,529,429 

41,191,786 

-30,396,263 

8,058,913 

*549,729,803 

$734,112,685 
727,342,285 
778,725,284 
868,755,664 



20.62 
20.63 
19.61 
20.01 
22.61 



113.40 13.80 

110.97 14.66 
110.09 14.11 
110.42 13.83 
112.47 13.00 

109.39 13.33 

108.98 13.39 
109.21 13.35 
109.57 12.65 
113.23 11.76 



113.25 
112.08 
115.24 
112.63 
115.87 

111.66 
110.40 
109.56 
109.65 
110.90 

109.51 
109.45 
109.12 
110.63 
112.01 

110.01 
109.02 
110.22 
108.65 
113.24 



,033,720,527 $7,226,346,851 $137,963,141 21.74 111.18 



110.97 
109.33 
107.60 
107.84 
121.65 



24.86 118.60 

24.64 120.33 

25.26 116.81 

26.18 117.22 



11.94 
11.79 
11.49 
12.10 
11.35 

11.95 
12.43 
12.91 
12.22 
11.66 

12.98 
12.17 
12.29 
11.42 
10.90 

11.66 
11.19 
11.64 
11.66 
10.95 

12.22 
11.62 
11.82 
11.52 
12.19 
*8.33 

8.58 
8.49 
9.29 
9.55 



Due to establishment of the Federal Reserve system. 



FUNDAMENTAL ECONOMIC FACTOES 75 

must be lowered, but experience alone for a period of years will 
determine the exact percentages which are dangerous or beneficial. 

A quicker knowledge of the general trend of monetary conditions ' 
in this country will be gained from the weekly Bank Statement, 
issued every Saturday by the Clearing House institutions in New 
York city. Bank clearings indicate that something over one-half 
of the business transactions of 135 principal cities of the United 
States take place in New York city, and from one-fifth to one-sixth 
of the demand deposits of the country are lodged in the National 
Banks here. Hence the condition of the Clearing House Banks 
in New York city affords an important clue to the general situa- 
tion in the country at large. The weekly Bank Statement is closely 
scanned by every active business man and financier. Surplus re-' 
serves, surplus deposits, the percentage of loans to deposits, and the 
percentage of cash to loans, are the principal items. There is al- 
ways a hidden reserve of loanable funds in New York in the pri- 
vate banks and other institutions not connected with the Clearing 
House, amounting to several hundred million dollars. Hence, the 
loaning power of New York city is not fully indicated even by the 
weekly Bank Statement. 

Investors are advised to watch the difference between loans and 
deposits in the National Banks of New York city. Normally, de- 
posits should exceed the loans. In dull times, they always do. In 
New York, the surplus of deposits over loans rose in 1899 to $144,- 
000,000 ; in 1904, to $110,500,000 ; in 1915 to $205,800,000. When 
an abundance of money is indicated by the magnitude of surplus 
deposits, interest, rates are sure to be low. One may rely upon it 
that the captains of finance and the restless spirits in Wall Street, 
who have been held in leash by a preceding period of high money, 
are quietly preparing for a revival of business and a bull market in 
securities. The banks always promote such a movement, because 
they are naturally desirous of higher rates of interest on their 
money. The first activity at the stock exchanges may be in the 
direction of a "shake-out" in prices, in order to eliminate the exist- 
ing public speculative long interest as far as possible. Within a 
few months, however, a bull movement in securities will be found 
under headway and coincidently a revival of business enterprise. 



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78 MONEY MADE IN SECURITY INVESTMENTS 

On the other hand, when surplus deposits are dangerously low, 
a situation will be revealed which may and commonly does fore- 
shadow a decline in stocks and a reaction in business, sometimes an 
actual crisis. 

In New York, the danger line was formerly about $30,000,000 
excess of deposits over loans. When surplus deposits had fallen to 
that narrow margin, the cause needed to be looked for in the over- 
extension of general trade and manufacturing, the excessive promo- 
tion of new business ventures, and over-speculation in securities. 
The country was then hurrying on toward a general reaction and 
perhaps a panic. Since the Federal Eeserve system now governs 
the banks of the country, the danger line must be placed far higher, 
but an exact fixing of the line must be deferred until the country 
has had a longer experience with the new financial regime. 

Previous to the resumption of specie payments, January 1, 1879, 
an excess of loans over deposits was the chronic state of affairs in 
the New York banks. October 25, 1873, the excess of loans was 
fully $87,000,000. Specie had been driven out of the country in 
enormous amounts by paper money inflation. To some extent, gold 
had been hoarded by individuals. Gold formed a relatively small 
part of the cash holdings of the banks. Great bull markets in stocks 
had been carried on during that period, through the use of paper 
money and bank credits; but after the resumption of specie pay- 
ments, the country was on a different basis. Gold gradually came 
back to the banks and deposits tended normally to run in excess of 
loans. Importance of surplus deposits will be illustrated by the 
tabulation on pages 76 and 77. 

A graph of the course of "Loans to Deposits" and "Cash to 
Loans" in the banks of the New York Clearing House is presented 
on page 79. Other factors remaining stationary, then when the two 
curves draw apart, with "Cash to Loans" above the other, monetary 
conditions favor a rise in stocks. When the "Cash to Loans" curve 
falls below the other, as in the latter part of 1914, or when the two 
curves approach and cross each other aimlessly, monetary condi- 
tions are unfavorable to stocks. The break in stocks in May, 1915, 
was due to the tragedy of the sinking of the Lusitania by a German 
submarine and the consequent fear of war between the United 



FUNDAMENTAL ECONOMIC FACTOES 



79 



CASH, LOANS AND DEPOSITS, NATIONAL AND STATE BANKS 
IN NEW YORK CITY. 



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108 
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Dotted line, Cash to Loans. 

Continuous curved line, Loans to Deposits. 

Zigzag line, Course of Price of six leading Stocks. 

States and Germany. When that fear was dissipated, stocks at 
once responded to favorable monetary conditions. 

When the banking situation becomes dangerous, as indicated by 
the diminution of Surplus Deposits, and especially after they have 
fallen below zero, and by the falling percentage of Cash to Loans, a 
man who believes that the bull market can be carried yet farther 
and a reaction in business avoided must know where ample supplies 
of money can be obtained. If deposit of Government money in the 
banks, an inflation of the currency, extensive foreign purchase of 
American goods and securities, or some other influence cannot be 



80 MONEY MADE IN SECUEITY INVESTMENTS 

brought into play to recruit the exhausted resources of the banks, 
then there is no other recourse except liquidation of stocks and a 
slowing down of business enterprises to relieve the situation. 
' It is sometimes said that a bull market is possible with high 
money. A part of the explanation of this is the fact that recovery 
in stocks, after a crash, begins while the banking situation is yet 
near its worst, but when improvement is clearly in sight ahead. 

Call money in New York is the quickest to feel a trend toward 
unfavorable conditions. Call money is declared to be the answer of 
the banks as to the way a present situation sums up. Time money 
represents the outlook for the future. When call money is up to 
the income yield of stocks, danger begins to develop. When time 
money is up to the same level, then the storm is at hand. Low rates 
for money, higher prices for securities. High money,, lower prices 
for securities. 

EARNINGS 

2. The value of the whole body of good securities, and of each par- 
ticular one, depends partly upon earnings. Those which have 
voting power are always worth something for control of corpora- 
tions. But it is axiomatic that, whether a stock pays a dividend or 
not, the larger the earnings, the higher the price. Earnings must 
be considered a separate and distinct force in the security markets. 
They are both an index of the times and a barometer of approaching 
financial weather. 

Growing earnings mean higher prices for stocks and bonds. Ee- 
duced profits, if due to other than transient or accidental causes, 
forecast a fall, which will be as certain in results as the laws of 
gravity. One has simply to consult the high and low prices of a 
number of selected stocks, with the dividends paid thereon in differ- 
ent years, to realize this fully. Vigorous and skillful manipulation 
may force a good dividend paying stock far above investment worth, 
but high prices cannot be maintained for a stock which does not 
earn anything. 

Whether Union Pacific shall sell at $4 a share, as it did in 1895, 
or around $219 as in the Fall of 1909, is regulated primarily by 
the earnings and size and certainty of the dividends. When United 



FUNDAMENTAL ECONOMIC FACTORS 81 

States Steel, preferred, then and yet paying 7 per cent, fell to $50 
a share in 1903, the effective force in bringing abont that very low 
price was the general fear, that 7 per cent would no longer be paid 
— the dividend on the common stock being then in peril, as later 
events proved. The recent rise in the Steels is due entirely and 
directly to the handsome earnings, the ability of the corporation to 
pay 7 per cent on the preferred in dull times, its enormous surplus, 
and the return to dividends on the common stock. Missouri 
Pacific passed its dividend in 1891 and worked down from $77 a 
share to $10 in 1897; when larger profits pointed to an early return 
of the stock to the rank of a dividend payer, Missouri Pacific rose 
irresistibly to $100 in 1901, even before payments were actually 
resumed. Amalgamated Copper went to $130 a share in 1901, of 
course through able manipulation, but the stock was paying 8 per 
cent; when the directors voted a dividend reduction and put the 
stock on a 2 per cent basis, the inevitable result was that in the 
panic of 1901 the stock dropped to $34 a share. Later, the stock 
rose to around $119 on being placed on a 6 per cent basis. Ameri- 
can Smelting, common, once a worthless stock, given away as a 
bonus, sold as low as, $37 in 1902 and 1903; but, after dividends 
were begun in 1904, a steady rise followed, and that once despised 
stock sold as high as $174 in the winter of 1905-6. Why did 
American Beet Sugar, common, rise from $9% a share in 1908 to 
$59% in 1911, before there was ever a dividend on the shares? It 
was because earnings were so handsome, that early declaration of 
dividends was inevitable. 

That is the broad principle, illustrated in the security markets 
by thousands of instances. 

The market in 1915 was full of striking examples of rise in price 
among non-dividend common stocks, which had resumed dividends 
after a long suspension or were approaching the time when initial 
dividends would be declared, based on unheard-of earnings. 

That earnings are the vital factor seems hardly worth farther 
argument. 

Railroads now issue monthly reports, and annual reports, in 
which net profits are set forth and compared with those of corre- 
sponding periods in the year before. Gross and net earnings of the 



82 MONEY MADE IN SECURITY INVESTMENTS 

principal lines, by months, are compiled and summarized by several 
of the financial weeklies and dailies of New York city. These are 
worthy of careful perusal by investors. They show at a glance the 
trend of the times as to railroad earnings and the relative prosper- 
ity of the several lines and systems. Among industrials, the best 
example of candor in dealing with the public is shown by the United 
States Steel concern, which issues once a month a statement of the 
increase or decrease of orders on hand, and once a quarter an 
elaborate statement of profits and state of the business. These 
reports furnish one of the most valuable items of news in the finan- 
cial papers. There is a growing tendency in these times among 
industrial corporations to publish quarterly reports of earnings. 

In former times, and especially from 1873 to 1893, earnings of 
the railroads were mainly influenced by the crops, the general 
activity of trade, and the state of harmony or competition which 
existed between them. Those factors have lost none of their im- 
portance, in these modern times; but others, entirely new, or pre- 
viously obscure factors have now come actively into play. 

Those halcyon days have passed when railroad managers could 
raise their rates, at will, to meet a higher cost of operation, or man- 
age their properties free of restraint. From time to time, a wave 
of popular hostility to railroads sweeps across this country, and is 
exhibited in a determination to extract the last possible dollar from 
the companies in the form of taxes and to burden them with expen- 
sive rules and regulations. In New York State, there is one 
prosperous rural township, highly cultivated, through which six 
miles of railroad line have been built. The local assessors so handle 
the subject of assessments, that the railroad is made to pay about 
one-sixth of the whole taxation of the township. From this rural 
board of assessors, all the way up through State authorities to 
Congress itself, the same disposition exists to tax and burden the 
railroads to the limit of endurance. In many localities in the 
United States, the local population almost entirely escape taxation, 
owing to the expense being assessed on corporations. Mr. Yoakum 
has calculated that the transportation companies are now paying 
$200,000,000 a year more than formerly, in consequence of State 
and National laws, some of which are ridiculous, because they im- 



FUNDAMENTAL ECONOMIC FACTOES 83 

pose expense without bringing the slightest benefit of any kind to 
the public, or a dollar of new earnings to the companies. 

Under either State or Federal laws, the following features of the 
railroad business are now subject to regulation : 

Freight and passenger rates. Kebates, pools and passes are forbidden. 

The issue of stocks and bonds. 

Number of men composing the train crews — in numerous cases extra 
brakemen being ordered by law, who are not needed for operation of the 
trains, and who are simply carried as passengers. 

Hours of labor, as set forth in 8 or 9 hour laws, 16 hour laws, and so on. 

Carriage of commodities in which a railroad is interested (except timber 
and lumber) is prohibited. 

Number, character and location of couplers, grab irons, brakes, draw bars, 
and other ' ' safety appliances. ' ' 

Compensation to injured workmen. 

Maintenance of way, grade crossings, switch connections, and provision 
for interchange of traffic. 

Operation and maintenance of telegraph and telephone lines. 

Size and commodiousness of stations, entailing employment of extra men 
at the new stations. 

All combinations and agreements are forbidden, except those of labor, 
leaving to irresponsible labor unions almost autocratic power over wages and 
thus over earnings. 

So minutely and exhaustively are the railroads now regulated by 
law, that in the words^of the late J. C. Stuart, vice-president of the 
Erie, "the sole remaining responsibility of the investor is the 
burden of loss of his investment." 

During 1912 and since, labor unions have become more aggressive 
in the United States in demanding shorter hours, higher wages, 
and recognition of the unions ; and a dangerous shibboleth has been 
heard, especially among the Industrial Workers of the World, to 
the effect that "labor is entitled to all it produces." In the minds 
of Socialists this really means the entire profits of all industries 
employing labor. The saying "labor is entitled to all it produces" 
grows out of a muddled and fallacious conception of the meaning 
of Adam Smith, in his discussions of the causes of "The Wealth of 
Nations." Labor may be entitled to all it produces, without the 
aid of capital. But capital also is entitled to all that it produces, 
with or without the intervention of labor. The fact is, neither has 
been able up to the present time to operate without the other. When 
capital and labor unite in production, each is entitled to its share 
of the profits. Undoubtedly, courageous discussion of the respective 



84 MONEY MADE IN SECURITY INVESTMENTS 

rights of capital and labor will eventually correct all error in the 
minds of labor on this point. But meanwhile, the aggressiveness of 
the labor unions has a distinct bearing on corporate earnings. 

With regard to railroad earnings, an excellent practice, for any 
one who has a large interest in the bonds or stocks of a particular 
line, is to tabulate the earnings, month by month, and figure out 
how much the road should earn in each month to meet fixed charges 
and dividends. The method shown below is merely an approxima- 
tion, because no one can tell until publication of the annual report, 
whether fixed charges have grown appreciably or not. But a tabula- 
tion of this sort indicates, closely enough for all practical purposes, 
whether or not dividends are safe or in danger. It was from such 
an analysis of the current earnings of St. Paul, that the author was 
able to predict, long in advance, a reduction of the 7 per cent divi- 
dend to 5 per cent at least, and which showed later unmistakably 
that St. Paul's 5 per cent dividend was in danger. Every road has 
peculiarities of traffic; but, as a rule, when the crops are going to 
market in the Fall months, earnings are then the largest of the 



Earnings of Chicago, Milwaukee & St. Paul, by Months 









Per cent of 


Amount required 




Monthly 
Gross 


•"'Final net 


annual net. 


monthly, to pay 




from operation, 


earned in each fixed charges:7 p. c. 




less taxes 


month, average 


on preferred, and 








of last 7 years 


4 p. c. on common 


1914. 










July . . 


$7,284,985 


$2,381,851 


8.90 


$2,599,000 


August . 


8,189,201 


2,149,240 


9.56 


2,792,000 


September . 


9,240,207 


3,205,773 


11.35 


3,315,000 


October 


8,873,520 


2,682,279 


13.05 


3,799,000 


November . 


7,379,909 


1,646,072 


9.17 


2,679,000 


December . 


7,282,244 


1,823,540 


8.12 


2,372,000 


1915. 










January 


6,696,115 


1,349,512 


4.87 


1,423,000 


February 


6,472,695 


907,320 


3.86 


1,128,000 


March . 


7,544,389 


2,473,753 


9.66 


2,821,000 


April 


6,877,038 


1,554,302 


6.18 


1,805,000 


May 


7,244,202 


1,639,630 


6.37 


1,863,000 


June 


7,810,869 
$91,435,374 


2,821,834 
$24,635,106 


8.91 


2,604,000 


Totals . 


100 


$29,200,000 



To final net from operation, add x Uh of the yearly "other income." or $304,142 a month. 



FUNDAMENTAL ECONOMIC FACTOKS 85 

year. In January and February, when snow blockades occur, profits 
are the smallest. On page 84 is a statement of St. Paul's earnings 
for the last fiscal year, which should serve as a type for other similar 
tabulations. 

The figures are compiled from the monthly returns to the Com- 
merce Commission and the total of net was slightly changed in the 
final annual report. They show that St. Paul did not quite earn the 
4 per cent for the common shares, in the fiscal year of 1915. A 
certain sum was taken from Surplus Profits account to make up the 
4 per cent payment. 

ANNUAL AGRICULTURAL PRODUCTION 

3. A hundred millions of people must have food and clothing, but 
the crops have an economic value for additional reasons. The soil 
of the United States produces new wealth from the ground an- 
nually, while distribution and exportation of this produce supply 
an immense tonnage of freight to the railroads and materially 
swell the balance of foreign trade in favor of the United States. 
In 1915, the total weight of the five principal grain crops alone 
amounted to 148,000,000 net tons. An average cotton crop of 
15,000,000 bales weighs 3,750,000 tons, all of which is moved by 
railroad. These figures suggest the value of the crops to the rail- 
roads. At least one-fourth, and on many Western lines 40 to 50 
per cent of the gross freight tonnage of the railroads consists of 
food products. Besides cotton, corn, wheat, oats, rye and barley, 
there is a vast additional quantity of hay, potatoes, tobacco and 
fruit carried by the railroad cars from the centers of production to 
other parts of the country. The rush of crops to the markets and 
the seaboard in September, October and November explains why 
gross traffic in those months exceeds that of other months of the 
year. 

The productions of the soil powerfully affect the prosperity of the 
United States in another way. Their money value in a good year is 
almost bewildering. The staple crops, which are reported on by the 
Government at Washington, approximate a money value ordinarily 
of $9,000,000,000 and in 1915 their farm value was $9,730,000,000. 
A fluctuation of $500,000,000 to $1,000,000,000 in this immense 



86 MONEY MADE IN SECURITY INVESTMENTS 

total, which is not -uncommon, is felt at once in the business world. 
A boom in stocks has more than once originated in bumper crops. 
Depression has, at times, begun with partial crop failure. The 
profits, and therefore the shares, of railroad lines which run through 
and from the grain and cotton sections of the country, are affected 
in the most direct and powerful fashion by generous or stunted 
crops ; and as they go, ordinarily, so goes the general market. 

As already noted in the chapter on Cycles, it is fair to assume 
that, after about three years of unfavorable weather conditions and 
moderate crops, there will ensue an equal period of good conditions 
and ample crops. And vice versa. According to this theory, 1916, 
1917 and 1918 should be poor crop years. It will also be of inter- 
est to bear in mind the singular fact, that years of maximum sun 
spots have usually been attended with a falling off in the produc- 
tion of cotton. 1916 will be the next date. 

Abundant harvests mean normally low cost of food; an excess 
production for export; great earnings for the railroads (ensuring 
bond interest and dividends, and often an increase of dividends) ; 
low priced raw material for the corn product, cotton seed oil, and 
other industries ; and a larger money return from foreign trade, as 
well as prosperity among farmers and planters who are large buyers 
of manufactures. In one way or another, handsome crops are a 
magnificent stimulus to practically every department of business 
enterprise in the United States. They are a tremendous force. 
Other things being equal, a series of good crop years means good 
times or a quick recovery from depression and better prices for 
securities. A succession of poor crops or a bad failure in any one 
year almost invariably exerts a reactionary influence upon trade 
and securities and has more than once led to a moderate panic. 

Cotton, in which the United States leads the world, is our prin- 
cipal agricultural money earner in the foreign trade. Of agricul- 
tural produce of all classes, we export from $800,000,000 to $1,000,- 
000,000 worth, annually; and almost one half of this consists of 
cotton. Were it not for these huge exports of cotton, the United 
States would be obliged to export hundreds of millions of gold, 
every year, or find some other way to pay for its imports of goods 
and securities. 



FUNDAMENTAL ECONOMIC FACTOKS 87 

Could all the arable land of the United States be brought under 
tillage or under irrigation, and especially under intensive cultiva- 
tion, the crops of grain would be twice as large as they are at pres- 
ent. Of the total area of the United States upon this continent, 
amounting to 1,903,289,600 acres, only 46.2 per cent is in farms 
(878,798,325 acres), and one-fourth of that is unimproved and not 
covered by forests. The United States has a capacity for produc- 
tion twice or thrice as large as ever known. There is great hope for 
the railroads in future years, in this fact. They appreciate the fact 
keenly, as witness the efforts of many of our important trunk lines 
to educate farmers in their territory in more profitable production 
from their lands. 

There is no topic more deserving of interested attention than the 
state of the crops. The United States Department of Agriculture 
issues monthly reports on condition of the grain crops, on or close 
to the 8th of each month, beginning in March and continuing until 
November. In December, a final report is published on or close to 
the 15th. In May, the reports begin to include hay. Beginning in 
June, the monthly report refers also to apples, peaches and sugar 
beets. Beginning in July, potatoes, tobacco, flaxseed and rice are 
also reported upon. Intermediate reports as to the condition of 
numerous minor crops are published on the 8th of each month, be- 
ginning in March. The initial report of the year on cotton is pub- 
lished on or about June 1st, and similar reports are given to the 
newspaper press on the 1st of each succeeding month until October 
inclusive. The final report comes out about December 10th. One 
of the best of the New York financial dailies also compiles its own 
estimate on cotton prospects. 



DOMESTIC TKADE 

4. A slackening of internal trade and manufacturing after a 
great boom precedes every financial crisis. Investors must be quite 
as alert to detect the signs of a coming change as are the bankers, 
rich men and stock market operators. It is axiomatic that railroad 
earnings are directly and seriously affected by active or dull times ; 
and the state of trade requires constant attention, never more so 



88 MONEY MADE IN SECURITY INVESTMENTS 

than when a boom in business or a reaction has run for a series of 
months or years. 

Data as to the course of trade are supplied by: (1) The Iron 
Trade Review and Iron Age, two weekly newspapers, devoted to the 
iron and steel trade. (2) Keports, which are published in the daily 
sheets, emanating from two mercantile concerns in New York city, 
Dun's and Bradstreet's. (3) Various sound and conservative finan- 
cial publications, including The Financial Chronicle, The Journal 
of Commerce, and The Wall Street Journal of New York, and The 
Boston News Bureau and The Boston Commercial of Boston, make 
a specialty of valuable commercial and financial reviews. The Fi- 
nancial Chronicle reports bank clearings in all the principal cities of 
the United States. From these publications, the business man and 
the owner of securities can detect a quickening or slackening of 
business enterprise and shape his course accordingly. 

The state of domestic trade touches our population more quickly 
and affects their interests more powerfully than does the foreign 
trade. The total volume of domestic trade has never been com- 
puted precisely, but it certainly amounts to at least 500 billions 
annually, whereas foreign trade seldom exceeds an aggregate of 
four billions. 

COMMERCE WITH FOREIGN LANDS 

5. A fruitful source of new money supplies is the foreign trade 
of the country, when the balance of imports and exports is in our 
favor. Conversely, an adverse balance in foreign trade imposes a 
serious drain upon the financial resources of the banks. 

The Government issues a monthly statement of imports and ex- 
ports, both of merchandise and specie, setting forth the balance of 
trade and in abundant detail the whole character of the exports and 
imports. The statement, summarized, is printed in all the daily 
newspapers. Statistics are sometimes dry reading, but those of for- 
eign trade are never so. To financiers, they are always eloquent. 

Eival economists differ as to the advantage of a large balance in 
favor of any country in foreign trade. It cannot be denied, how- 
ever, that a large balance is a force in finance in the United States 
and influences the value of American securities, both in general and 



FUNDAMENTAL ECONOMIC FACTOES 89 

in particular. For instance, the huge export trade in fabricated 
iron and steel affects the value of the shares of the United States 
Steel Corporation, while the wonderful bull market of 1915 in the 
so-called "war shares" was due entirely to the immense exports of 
this country in munitions of war. 

In spite of the wonderful expansion of wealth in the United 
States during 1896-1907, which gave that Cycle a unique position 
in American annals, our country is yet in urgent need of billions 
more capital for development of its natural resources, its manufac- 
tures and its transportation lines. The bulk of the new capital may 
be looked for from savings, our own annual increase in wealth and 
production of gold. Yet a succession of favorable balances in for- 
eign trade with other continents contributes powerfully toward the 
funds which are required. 

Normally, when the balances of trade in our favor are large, gold 
is imported from other lands. At such times, Europe usually buys 
American securities and this also favors gold imports. When the 
balances are small, gold is exported; and usually, at such times, 
Europe has the distressing habit of selling back to us a large volume 
of our securities. A glance at the Statistical Abstract and other 
Governmental compilations will reveal the facts as to the balance 
of trade and gold exports or imports. Gold is the leading basis of 
bank credits. More than one smart advance in stocks has followed 
large importations of gold. Many a setback in prices has been due 
to lively gold exports. The booms of 1902 and 1908 are modern 
instances of the effect of large balances in foreign trade attended by 
gold imports. The setback in 1910 was coincident with a heavy 
decline in the balance of foreign trade and large exports of gold. 

When the United States enjoys a heavy favorable balance in its 
foreign trade, leading capitalists revel in that fact and usually buy 
stocks, in part to meet an expected foreign demand for them. 

TARIFF DUTIES ON FOREIGN GOODS 

6. Since July 4, 1789, when the Congress of the United States 
first established a schedule of duties on imports, something more 
than 190 tariff laws have been enacted. Among this number, 23 
laws established a general revision of the duties. While the pro- 



90 MONEY MADE IN SECUKITY INVESTMENTS 

priety of high or low duties has been a subject of dispute since the 
adoption of the Constitution, no one will contest the assertion that 
a substitution of duties, framed to protect and stimulate home 
manufactures, for duties aiming at revenue only, or vice versa, has 
always been a momentous event and has profoundly affected the 
general course of business and trade and thus of securities. The 
author has tabulated and compared the 23 principal tariff laws and 
has examined the history of the times in each case, with a view to 
discover the economic consequences of each act. This study has 
revealed certain inflexible facts. 

Every period of general prosperity which the United States has 
ever enjoyed, for 80 years or more, every period of good prices for 
securities, has been coincident with protection to manufactures 
under the tariff laws, or the promise of speedy enactment of a pro- 
tective tariff. Conversely, every period of depression in business 
and lower prices of securities has been coincident with reduced 
duties on foreign goods or threat of the speedy enactment of a lower 
tariff. This statement does not affect the question as to whether or 
not it would be possible for manufactures to thrive, with duties 
about like those of the Payne Tariff of August 5, 1909, for instance. 
But it does bear on the question as to whether good times will pre- 
vail, if the principle of protection is wholly eliminated from the 
laws. Manufactures have been built up in the United States by 
protection ; and billions of capital are invested in the plants, while 
more than 7,000,000 men and women, and their families, derive 
their daily bread from the wages earned in these establishments. It 
is a vast interest, whose prosperity depends upon maintenance of 
the home market for American capital and labor. 

Tariff laws are a tremendous force in financial affairs ; and every- 
thing which affects our economic policy is of absorbing interest to 
the owners of securities. Here are a few facts bearing on the sub- 
ject : 

March 2, 1833 : Enactment of the Clay compromise tariff, which provided 
that all duties over 20 per cent should be reduced, by deducting y 10 of the 
excess, annually, from December 31, 1835, until, by June 30, 1842, all the 
excess over 20 per cent should have disappeared. This law was slow in its 
operation and trade flourished for several years; but gradually, as the 
duties came down, things began to work badly, and the lower tariff was one 
cause of a long prostration of business and the panic of 1837. Excess of 



FUNDAMENTAL ECONOMIC FACTOES 91 

imports increased from $6,349,485 in the fiscal year of 1834 to $52,240,450 
in 1836, which was large for those times. 

August 30, 1842: A higher tariff was enacted, cutting down imports and 
wonderfully stimulating trade and manufactures, and turning an unfavora- 
ble into a very favorable balance of trade. Good times ensued for several 
years. 

July 30, 1846 : Again a lower tariff became law, increasing imports stead- 
ily, and bringing about sluggishness in trade. Excess of imports had 
mounted to $60,760,030 by 1854. 

March 3, 1857: A general reduction of duties was enacted, amounting to 
about 20 per cent. This was one of the inciting causes of the panic of 1857. 
Liquidation set in, several months before the law was enacted, and as soon 
as its passage was discovered to be foreordained. A terrific panic followed. 
By 1860, the business interests of the country had been reduced almost to 
insolvency. From $38,000,000 to $59,000,000 of gold had been going out 
annually. 

March 2, 1861: Enactment of the Morrill protective tariff law. The rise 
of American manufactures dates practically from that law. The good times, 
which followed in the North, and the extraordinary rise in securities, lasting 
until 1864, grew in part out of the immense disbursements by the Govern- 
ment for war material and the issue of a flood of paper money. But it is 
known to all men, that the Morrill tariff law contributed powerfully toward 
the same end, and would have been sufficient without inflation of the cur- 
rency. Duties were increased by the laws of July 14, 1862, and June 30, 
1864. 

June 6, 1872: A general reduction of about 10 per cent in duties was en- 
acted. In this case, the lower tariff was only one of the lesser causes of the 
terrible panic of 1873, but it was an influence directly tending to produce 
the result. 

March 3, 1875: The 10 per cent reduction of 1872 was repealed. Good 
times did not start immediately. Several weak spots in the financial situa- 
tion had to be eliminated first. But when soundness had been restored all 
around, the tariff law of 1875 gave a powerful impetus to business, and was 
instrumental in the great boom of 1880-1881. It led to enormous favorable 
balances in foreign trade ($264,661,666 in 1879). 

March 3, 1883 : A new law was placed on the statute books, enacted by the 
friends of protection in deference to popular clamor. A few duties were 
raised. Others were reduced. On the whole, the new scale of duties was 
lower and distinctly unfavorable to the textile trades, which suffered se- 
verely. The severe setback of 1884 and 1885 was largely the consequence. 
General business finally recovered somewhat, thereafter, but manufactures 
were not flourishing. The favorable balance in foreign trade gradually ran 
down, until in 1888, there was an excess of $28,002,607 in imports. 

October 1, 1890 : The McKinley protective tariff bill was enacted. Securi- 
ties began to rise and business to improve, from the moment of the election 
of a protective tariff administration in 1888 (Harrison). Prosperity lasted 
for four years, namely, until 1892. 

August 27, 1894: The "Wilson revenue tariff became a law, under Cleve- 
land. President Cleveland had been elected in 1892 ; and from that moment, 
business and stocks became retrograde, due to alarm over the tariff, cul- 
minating in the panic of 1893 and the long depression, which did nqt end 
until 1896. 

July 24, 1897: The Dingley protective tariff became a law. McKinley 
had been elected President in 1896, and the tide of business and securities 
turned definitely upward from that day. The era of prosperity which ensued 



92 MONEY MADE IN SECURITY INVESTMENTS 

needs hardly to be described. It was unexampled in history. Securities 
reached the highest prices ever known, in many cases, and wealth increased 
by leaps and bounds. 

August 5, 1909: The Payne tariff became a law. The American public 
has refused to accept this law as instituting lower duties. It is true that a 
few, extremely few, duties were slightly raised. The cotton and woolen 
schedules remained practically unchanged. But on a large number of ar- 
ticles, the duty was heavily reduced, being cut in half in many instances; 
and this fact, together with the prospect of farther revision, proved a serious 
brake on manufacturing enterprise, especially on profits. 

October 3, 1913 : The Underwood Ke venue Tariff became a law, a low 
tariff administration having been elected in November, 1912, by reason of a 
split in the protective tariff party. Business became retrograde in the 
United States immediately after the election. A large variety of articles 
were placed upon the free list by the Underwood law; and the duties upon 
nearly all manufactures were substantially reduced. Trade and manufac- 
turing gradually slackened in the United States; and business revival set in 
in 1915, only upon the receipt of orders from Europe for more than a billion 
dollars' worth of food and war munitions. This revival rests upon an in- 
secure foundation. When the war ends, American manufacturers will be 
exposed to a fierce competition under the present schedules of duties. 

All writers on crises unite in giving great weight to tariff 
changes. Investors are directly concerned in the subject. 



COMPETITION 

7. There is no influence to which a particular stock responds more 
quickly than new and damaging competition. It would be almost 
impossible to point out a form of business in the United States 
which is not exposed to competition in some form or other. Even 
the great railroad lines, which seem to have an entire monopoly of 
local traffic, even the Standard Oil Company and various of the 
other so-called trusts, which appear to come the closest to monop- 
olies, live, move and have their being in an atmosphere of competi- 
tion and not one of them is free from more or less of it. 

Community of interest and the establishment of equal rates by 
the Inter-State Commerce Commission have, in these modern 
times, minimized rivalries but they have by no means abolished 
them. 

While competition is a necessary condition, under which business 
is carried on, it is only such an increase of competition as is likely 
to exert a vital influence upon earnings that proves disconcerting. 

When Andrew Carnegie proposed to build a tube plant in Ohio 
in opposition to the National Tube Company, this was a serious 



FUNDAMENTAL ECONOMIC FACTOKS 93 

threat; and the common and preferred stocks of the company 
named promptly fell $19 and $13 a share, although no actual com- 
petition could have been felt for a year afterward. 

The genuine nature of the calamity of new and unreasonable 
competition was well exhibited by the loss of earnings, consequent 
upon the rate wars between trunk line railroads in the '70s and '80s. 

An extreme case of loss inflicted upon stockholders by new and 
dangerous competition was the historic break in Pacific Mail and 
Panama Kailroad, after the opening of the overland rail route to 
California. Those stocks had sold at unheard-of prices during the 
Civil War period, as a result of enormous earnings. In September, 
1868, Panama was quoted at $369. Pacific Mail sold at $329 in 
1865, and even after a stock dividend of 33% per cent in 1866, it 
sold at $174. More than a year before the Union Pacific route was 
thrown open for business, far-seeing holders of Panama and Pacific 
Mail stocks became convinced that trade and travel would naturally 
seek the shorter and more expeditious line to San Francisco; and 
they began to sell out. By the time the overland railroad was ac- 
tually in operation, less attentive stockholders took alarm also and 
selling was more general. By 1870, Pacific Mail had fallen to 
$30%, and by 1871, Panama was down to $49. The whirligig of 
time has wrought a curious change in the relations of the transcon- 
tinental lines with the Panama route between the East and West 
coasts of the country. Opening of the Panama Canal has brought 
back to that route a part of the traffic, which was long diverted to 
the lines across the plains. 

New York Central stock was worth $155 in January, 1881, but 
the West Shore road was finished in 1882 ; and New York Central 
fell to $81% in June, 1885, in consequence of loss of earnings. It 
was then that the Yanderbilt interests, in desperation, acquired the 
entire capital stock of West Shore and put an end to a competition 
which was slowly wrecking the prosperity of the older company. 

Metropolitan Street Eailway sold at $269 in 1899, at which price 
it may or may not have been dear, all things considered. But after 
the Subway in New York had been opened for traffic and had di- 
verted millions of fares to its own coffers, Metropolitan sold as low 
as $103. 



94 MONEY MADE IN SECURITY INVESTMENTS 

No doubt, the effects of excessive competition have come within 
the personal experience of thousands of business men. It is im- 
portant for an investor to be wide awake to every sign of coming 
serious rivalry against companies whose stocks he owns. 



GOLD PEODUCTION 

8. According to Dr. Adolph Soetbeer, an authority on this sub- 
ject, not more than about $3,000,000 of gold was added annually to 
the world's supply up to the time of the discovery of America. 
When the Spaniards began to take unto themselves and send to 
Europe the riches of Peru and Mexico, the annual addition to the 
world's stock of gold was larger, but had not risen above an average 
of $14,000,000 a year up to 1840. Marshall's find in California and 
the discoveries in Australia gave an impetus to the output of gold. 
In 1860, the yearly addition to the general stock of gold was about 
$140,000,000. Many of the first deposits and mines having been 
worked out, the annual production fell to $115,000,000 in 1885. 

South Africa and Alaska have since come into play. According 
to George H. Roberts, Director of the Mint at Washington, gold 
was poured into circulation in 1904 to the amount of $347,150,700. 
The mines are now even more prolific and are sending out more 
than $1,000,000 of the metal every day. The output in 1912 was 
nearly $466,000,000. 

Students of finance are of the opinion, that the great mass of 
gold which is being added to the reserves and coinage of the civilized 
world will tend to minimize any serious monetary stringency here- 
after and will have the effect of a mild and slow inflation of prices 
of stocks and all commodities. 

Frank A. Vanderlip, the banker, has pointed out the startling 
fact, that, at the present rate of gold mining, the gold coin of the 
world will be doubled in the next twenty years. It now amounts to 
$6,000,000,000. Should there be no interruption in the stream of 
treasure now pouring into the mints, the effects of gold inflation are 
likely to be more rapid in coming years. 

It is doubtful if an enlargement of the world's stock of gold will 
ever prevent periods of monetary stringency. The demands of gov- 



FUNDAMENTAL ECONOMIC FACTOKS 95 

ernments and the inexhaustible energy of business men will always 
keep pace fully with banking resources. More gold may, however, 
minimize the evil. 



MINOR FACTORS 

Economists, who endeavor to establish an Index Number, or 
barometer, which will sum up and express in one figure the average 
effect of all fundamental economic factors, take cognizance of va- 
rious other matters, in addition to those named above. They in- 
clude : 

Mercantile failures and bankruptcies. 

Statistics of new building construction. 

Average price of leading commodities. 

Number of letters carried in the mails. 

Velocity of money in circulation. 

Labor conditions and statistics of immigration. 

Course of price of a group of stocks. 

Volume of stock market transactions. 

Number of idle railroad freight cars in the country. 

Bank clearings in the principal cities. 

These subjects are all of interest, but they practically all follow 
the 8 great fundamental economic factors, affecting the trend of 
business and securities as set forth in detail above. These 8 are 
sufficient for the guidance of a practical man. Some economists 
figure out as many as 30 fundamental factors, each of which should 
be studied. The late J. P. Morgan recognized only two, Money and 
Earnings. 

THE BIG MEN IN FINANCE 

A brief allusion may be made to one other force in affairs, which, 
however, is more correctly the logical product of Fundamental Eco- 
nomic Factors rather than a separate and additional member of the 
group, namely, the attitude of the captains of trade, industry and 
finance toward business and securities. In every generation, there 
have come to the front a certain number of able men, whose intense 
nervous energy, ambition, initiative and clear vision have enabled 
them to tower head and shoulders above their fellows and who have 
led all the great movements for development of the resources of the 



96 MONEY MADE IN SECURITY INVESTMENTS 

country and the promotion of its manufactures, trade and financial 
importance. 

These men have risen to wealth. Some of them founded and 
made a part of their fortunes in business pursuits. The Vander- 
bilts, Astors, the Rockefellers and their associates, the Havemeyers, 
the Dukes and their associates, Mr. Carnegie, E. H. Harriman, 
John A. Stewart, John W. Gates, Daniel G. Reid, H. C. Frick and 
a large array of other brilliant men gained fortunes originally 
through the creation of great and profitable lines of practical busi- 
ness. But with remarkably few exceptions, these and other men 
prominent in finance for the last half century in the United States 
have gained a large part of their wealth through transactions in 
securities, for the execution of which they employed the capital, 
previously acquired in business pursuits. 

The power of those men in the business world and the security 
markets when they are united, is almost unimaginable. Not only 
can they bring vast wealth of their own to the development of busi- 
ness enterprise and purchase of securities, when they deem it proper 
to do so, but they have such relations with financial institutions, 
banks, trust companies, insurance companies and railroads, in 
which they have investments, that they are able to influence the 
employment of enormous capital, in addition to their own, for any 
desired operation. They are the men who finance great business 
undertakings of all kinds when conditions are ripe, who promote 
manufactures, railroad building and business booms, who provide 
employment for hundreds of thousands of their countrymen and 
who are the inspiration of every important bull market in stocks. 

The attitude of the captains of finance, trade and manufacturing 
is of great importance. It is, however, the product of fundamental 
conditions. These men are masters of the art of judging conditions 
and they invariably conform their practice thereto. Leaders always 
take a position with reference to the long look ahead. The private 
individual who is a competent judge of conditions need never be in 
doubt as to the attitude of the big men toward business and securi- 
ties-. 



FUNDAMENTAL ECONOMIC FACTORS 97 

INDEX NUMBERS 

An Index Number is arrived at by selecting a large group of Fun- 
damental Economic Factors, giving each one a value in figures, 
adding up the column of figures, and dividing the total by the num- 
ber of items in the column. Different authorities employ different 
methods and different units to arrive at their Index Number. 
Bradstreet's selects such units as will most clearly reveal the trend 
of trade. Other economists both in America and England adopt 
a basis for their Index Numbers, which indicates the trend of 
money and securities. All the Index Numbers have important value 
and each one is worthy of the interested attention of business men 
and investors. The author of this book has made an effort to tabulate 
such factors as bear most directly upon the value of securities. 
Students of this subject would do well to study Irving Fisher's 
"Purchasing Power of Money" for a glimpse of the manner in 
which at least one Index Number is arrived at. The author's Index 
Number, adopted after many experiments and after many changes 
of plan, shows the trend of underlying Conditions affecting Money 
and Business, as set forth below. For comparison, a line is in- 
troduced into the chart which indicates the course of average price 
of 25 industrial shares at the New York Stock Exchange. Indus- 
trials have been more responsive to monetary and business condi- 
tions in recent years than the railroad issues, the latter having been 
subject to special influences emanating from the laws and the regu- 
lation of rates by the Commerce Commission. 



Some time is likely to elapse, after beginning the study of broad 
conditions, before an investor will be able to apply his information 
correctly to the concrete subject of the time to buy and sell securi- 
ties. He should study them diligently, however, and the exercise 
will prove of the utmost service in the course of time. 

The main point is to discover, as far as possible, in good times, 
the approach of a crisis and reaction in trade; and, in bad times, 
the coming turn for the better. 



98 MONEY MADE IN SECURITY INVESTMENTS 




Index Number of Conditions and the Stock Market. 

Dotted line, Index Number of Conditions affecting the Stock Market. 

Zigzag line, Course of Price of twenty-five Industrial Shares. 



Suppose that the times have been booming for a few months or 
years ! Examine now the less obvious facts of the situation ! Are 
loans in excess of deposits ? Are interest rates high ? Are financial 
men anxious about the supply of money ? From what direction can 
relief, if any, be expected? Are corporations in the market for 
more money, at the very time when money is scarce; and are new 
issues of stocks and bonds being launched, enormous in the aggre- 
gate? Are wages rising? Are the prices of commodities high? 
Have stocks been bulled to a height above actual investment worth ? 
Is foreign trade good or the reverse ? The promise of the crops, is 
it good or the contrary ? Does extreme optimism prevail and is per- 
sonal extravagance seen on every side? Have there been serious 
exposures of wrong-doing and fraud, and is there reason to believe 



FUNDAMENTAL ECONOMIC FACTORS 99 

that more are forthcoming ? Has a great calamity, like the Chicago 
fire or. the San Francisco earthquake, caused a tremendous loss of 
capital and impaired the financial resources of the country ? 

Some one or more of these evil factors may always be present in 
affairs, without great harm; but when a majority of them combine, 
the situation is growing dangerous ; and a prudent man will get out 
of stocks on any boom in the market, and stay out. The situation 
is sure to be doubly precarious, if the stock market has had four or 
five years of improvement since the last depression, or if it has had 
a steady rise for a year or two, without a serious reaction. 

Per contra, assume that a reaction in trade and stocks has lasted 
for one or two years at least, and that there has been thorough and 
severe liquidation. Failures have been heart-rending. Mills and 
shops have reduced their output, thousands of workmen have been 
discharged, stocks of goods on hand have declined, and general re- 
trenchment has been enforced. Now look at the resources of the 
banks ! Has idle money accumulated there in great stores ? Are 
interest rates low ? Are stocks selling on a 4, 4% or even 6 per cent 
basis? Has the stock market reached a state of prostration, where 
bad news does not suffice to send prices lower ? If these factors are 
all present, then an investor can buy back his stocks at any time, 
without waiting for the final drive at prices. 

Both at the top and at the bottom of the market, several weeks or 
months are likely to elapse before there is any important change in 
prices. An investor need not be misled by appearances. If he has 
bought on a reaction, and held on through several months or years, 
and has a good -increment on the value of his stocks, he can sell 
when the situation is dangerous, with absolute equanimity. At the 
other extreme, he can buy. In both cases, he must resign himself 
to wait for several months or a term of years, before the time comes 
for him to take action anew and either buy or sell his favorite 
stocks. 



VIII 
GOVERNMENT OWNERSHIP 

OPERATION OF THIS SYSTEM ABROAD, COMPARED WITH EFFICIENCY OF MANAGE- 
MENT AND SERVICE IN THE UNITED STATES.— WHEREIN THE SUBJECT INTER- 
ESTS THE OWNER OF SECURITIES. 

The Constitution of the United States, adopted by the sound and 
courageous men, who had won the Independence of this repub- 
lic, was framed to secure certain definite objects, two of which were 
"to provide for the common defense" and "to promote the general 
welfare." It has always been understood by Americans, born of the 
old stock of original settlers and founders of the Constitution, that, 
in this country, it is not the province of Government to engage in 
any form of practical business in competition with its own citizens, 
or to undertake any form of business, which its own people are 
competent and willing to carry on. In Europe, for military rea- 
sons, various Governments have ignored a principle, which is fun- 
damental in the United States, and they now own and operate 
railroads, telegraph and telephone lines, and some other public 
utilities. Within the last generation in the United States, the rest- 
less desire for change in many not well balanced minds and the 
socialistic leanings of labor unions, composed largely of workmen 
of European descent and full of European ideas, have led to propo- 
sitions for Government Ownership of public utilities in many cities 
of this country, in several States, and in the Nation at large. Mu- 
nicipal ice plants have been established in several cities, gas plants 
in some, and local street railroads here and there. Some of these 
are leased to private operators ; others are operated by the munici- 
palities themselves. New York city owns and operates the ferry to 
Staten Island. Georgia has a short State railroad. The United 
States once partly owned a great United States Bank. It now 

100 



GOVERNMENT OWNERSHIP 101 

owns the Panama Canal and the Panama Railroad and is construct- 
ing a railroad in Alaska, while Government Ownership of telegraph 
and telephone lines has been assiduously urged by the Post-office 
Department, and of a large fleet of ocean-going merchant steamers 
by President Wilson. A part of the express business of the country 
has been taken over by the Post-office Department. 

This subject is of sufficient interest to the owners of railroad, gas, 
telephone and telegraph securities, as well as to the people at large, 
to deserve a few words of discussion in this book. Government 
Ownership is not necessarily a Fundamental Economic Factor, al- 
though it bears on the value of railroad and other securities. The 
subject deserves separate treatment. 

Government wires were first conceived in Militarism. When 
they were first introduced in Europe, it was with no other thought 
than that the service was military in character, and could be used 
to military advantage in facilitating communication. See Profes- 
sor Holcombe's book on "Public Ownership of Telephones on the 
Continent of Europe." Wire service was not even opened to public 
use, at first, but could be used only for military purposes. It origi- 
nated with the optical telegraph, in France. This was later adopted 
by Prussia and England, and was succeeded by the electro-magnetic 
telegraph. The idea that the telegraph could be built up by private 
enterprise upon a commercial scale for public use, was completely 
obscured by the military feature. Government management of tele- 
graphs in one country of Europe, of course, meant Government 
Ownership of telegraphs in all. The principle of competitive mili- 
tarism would permit no other course. Consequently, when the 
telephone came into existence, it was regarded, abroad, as a sort of 
telegraph. In some countries, on that theory, it was made part of 
the postal service, together with the telegraph. In others, its de- 
velopment was allowed under private enterprise, until the efficiency 
of the latter forced the governments to take over the telephone in 
self-protection. "No country/' says Professor Holcombe, "was 
able to retain the possession of its telegraph system, and at the same 
time leave the telephone in alien hands; The conflict of interest 
was too sharp. No country cared to abandon its telegraphs. There- 
fore it was compelled to acquire the telephone. . . . The historical 



102 MONEY MADE IN SECUKITY INVESTMENTS 

truth is that the policy of private ownership under public regulation 
never had a fair trial." In the United States, the telephone, tele- 
graph and the railroads all originated in private enterprise and were 
developed by private capital. 

In an undertaking as vast and costly as the Panama Canal, the 
construction of which would have exceeded the ability of private 
capital (as witness the fiasco of Ferdinand de Lesseps, who at- 
tempted to build the canal with French private capital), the enor- 
mous expense supplied a ready, acceptable, and perhaps sufficient 
excuse for leaving that particular project to the National Govern- 
ment. The same excuse was found for the construction of State 
highways and State canals. But that argument does not apply in 
any respect to the proposition that the Government shall take over 
American railroads, telephone and telegraph lines, and other na- 
tional utilities, already in existence, already built, already in suc- 
cessful and efficient operation. There are the lines, already. Such 
extensions of these public utilities as are demanded by the growth 
of population and settlement of the prairie and mountain States of 
the West, can readily be furnished by private capital, and will 
cheerfully be furnished, provided that the laws render the invest- 
ments safe. Judicious and sympathetic regulation of these utilities, 
in order that the expense of operation to the public shall not be 
excessive, seems to be all that is required in these modern times to 
secure subscription of practically unlimited capital for extensions. 

No military reason exists for Government Ownership in this free, 
peaceable and independent republic. During the late Civil War in 
the United States, it indeed became expedient for military reasons 
to create a system of transcontinental railroads from the Mississippi 
River to the Pacific Ocean. The Government did not itself build 
them. It inspired private capital to perform the work and take the 
risk, by donating a large acreage of unoccupied land in the West to 
companies, which would agree to construct the roads. Private 
capital came forward promptly and patriotically and the roads 
were built. The Panama Canal was undertaken, in part for mili- 
tary reasons. But no such reasons exist for the construction of a 
Government railroad into Alaska or for Government Ownership of 
the already established railroad, telegraph, telephone or express 



GOVERNMENT OWNERSHIP 103 

services of the country. Private capital is adequate to all require- 
ments, and will be supplied without limit, if the policies of the 
Government encourage private enterprise, reasonably, in accordance 
with the spirit of our institutions. 

Sixty years ago, when vessels propelled by steam began to replace 
the magnificent clippers and sailing packets, which were carrying 
the American flag and American prestige into every ocean port in 
the world (and incidentally were transporting the bulk of the 
exports and imports in our foreign commerce), our Government 
found it expedient to create a fleet of American steamships, both for 
economic and military reasons. But the Government did not itself 
build or own the ships. It imitated the policy of all the maritime 
nations of Europe and offered mail subsidies to American com- 
panies, which would build and operate an American steam marine. 
Private capital promptly supplied the Collins and Mills lines to 
Europe. The ships had no superiors in the world, and they enabled 
this country to retain the bulk of the swift mail, passenger and 
freight commerce of this country, until Congress for political rea- 
sons repealed the subsidies. Should the laws give proper encourage- 
ment to American shipping once more, then private capital would 
see to it at once that the fleet of steamers, which is being operated 
by International Mercantile Marine, would have an abundance of 
company in the ocean trade. Every sea on this planet would be 
covered with swift and handsome vessels, flying the American flag. 

March 1, 1913, President Taft signed a bill, which thereupon 
became law, for physical valuation of the railroads, telephone and 
telegraph lines of the United States. One of the motives which led 
to this enactment was a desire to obtain authoritative data, from 
which to judge whether or not American railroads and electric 
lines are overcapitalized. But there was also the farther desire on 
the part of many to ascertain the cost to the Government of the 
ownership of these utilities. While conscious of the folly of an 
unnecessary investigation, which is expected to cost $50,000,000 
and consume five years of time, the railroads, telephone and tele- 
graph companies have welcomed it for the sake of the education of 
the American people. The investigation is now in progress. It 
has been completed in the case of one railroad, the Lehigh Valley. 



104 MONEY MADE IN SECUKITY INVESTMENTS 

Omitting all coal lands and collieries, the engineers find that the 
Lehigh Valley property is worth $324,478,300, while total capitali- 
zation amounts only to $136,375,600. Should this percentage of 
value and capital hold good, on average, throughout the United 
States, it would cost the Government to buy the lines, if actual 
value is to be paid for the properties, 2% times the railroad 
capital of the country, or not less than about 50 billions of dollars. 
This staggering expense would be paid for presumably in United 
States bonds, bearing Sy 2 to 4 per cent interest, thus imposing an 
annual tax of 1% to 2 billion dollars upon the people. Net cor- 
porate income of the railroads has, in recent years, run between 
$300,000,000 and $470,000,000 a year, according to the activity of 
trade. Therefore, the taxation involved in Government Ownership 
of the railroads of the United States would amount to three or four 
times as much as the present net income of the companies. In 
other words, it would be compulsory to treble or quadruple the 
freight and passenger rates of the United States to enable the Gov- 
ernment to operate the railroads without loss. This is a burden, to 
which the American people would not submit for a moment. 

Even if the Government should succeed in taking possession of 
the railroads by buying their stocks and bonds at the present de- 
pressed market price of some of them, the expense would be more 
than 20 billion dollars ; and taxation on that account would average 
more than twice the net income of the roads. Again, it would be 
necessary to increase freight and passenger rates. 

The same general fact is true of the telephone and telegraph 
lines. The properties are worth more than the united capital of the 
companies. To operate them as Government Owned utilities would 
increase the expense to the public heavily. 

In another respect, Government Ownership of these great utilities 
would prove so disastrous, that it is incredible how any man of in- 
telligence could consider the insolent proposition for a moment. 
The watchword in private enterprise of every description in this 
country, in factories, railroads, telephone systems, telegraph offices, 
mercantile and all other business establishments, is efficiency in the 
management and efficiency in the service rendered. It is almost 
invidious to mention any one of our modern great corporations as 



GOVERNMENT OWNERSHIP 105 

typical of all in this respect ; but the business world of the United 
States would probably select the Bell Telephone system, now con- 
centrated in the ownership of the American Telephone & Telegraph 
Company, and managed by that most competent of men,- Theodore 
N. Vail, backed by able associates, as, par excellence, the highest 
type of efficiency in management and service rendered in the United 
States. In France, where the Government has a complete monopoly 
of the telephone, it often requires from one to four hours to secure 
a long distance connection with another city. In the United States, 
4 minutes is seldom necessary. In many countries, where the tele- 
phone is owned and operated by the Government, the offices are not 
open all night, or indeed all day for that matter. New installations 
consume 4 weeks abroad, compared with 4 days here. In all coun- 
tries, where there is Government Ownership of the telephone, delay, 
confusion, indifference and abominable mismanagement prevail to 
a degree that is absolutely intolerable to an American, travelling 
abroad, accustomed as he is to the swift, satisfactory and compe- 
tent service supplied by American Telephone and Telegraph. In all 
of those countries, official investigations have repeatedly revealed 
the fact that initiative and efficiency are sacrificed, at once, by 
Government Ownership; and that a service managed by public 
officials rapidly deteriorates, falls into a hopeless muddle, and is 
impossible of improvement. This is the official record. The pub- 
lic, in foreign lands, endure these troubles because of a supposed 
military necessity. 

Identical facts are the record of Government Ownership of rail- 
roads abroad. It is scarcely necessary to enter into details. The 
facts are beyond dispute. Official committees admit them. Quick, 
cheap and efficient service is the rule in the United States. Slow, 
crude, inefficient and expensive service is the rule under Govern- 
ment Ownership abroad. 

Not only would Government Ownership in America burden the 
country with a staggering initial expense and vastly increased taxa- 
tion afterward, but no public benefit would be derived from it. It 
has been proved impossible by actual experience to compel the 
officials of public railroad, telegraph and telephone lines to exer- 
cise economy in administration, to pay respectful and prompt atten- 



106 MONEY MADE IN SECURITY INVESTMENTS 

tion to patrons, to initiate improvements in the service, and to 
coordinate their efforts for the public good. Efficiency, speed in 
execution, and untiring devotion to successful financial manage- 
ment are the last qualities to be expected from the clerks and em- 
ployes of Government Owned public utilities. No opportunity for 
graft is neglected. 

Should Government Ownership prevail in the United States, the 
manner and spirit in which the national administration would ap- 
proach the subject would be of vital interest to all owners of securi- 
ties. The Constitution provides: "nor shall private property be 
taken for public use without just compensation." What would 
constitute just compensation for railroad, telegraph and telephone 
lines ? What the properties are actually worth, on an official valua- 
tion? What the market value of the securities is, at the time of 
condemnation of the properties? If the latter idea is to prevail, 
then it is within the power of Government, by drastic regulation 
and interference with rates, so to depress the market value of securi- 
ties, to the financial injury of its own citizens, as to obtain posses- 
sion of the properties at a figure far below their intrinsic value. 
Witness the depressing effect on railroad, express, telephone and 
other securities during the past ten years of public regulation! 
Such a policy would practically amount to confiscation. Would 
the people of this country subscribe for an enormous bond issue, in 
order to pay cash for the properties, under such circumstances? 
The situation is such that both the owners of securities, the patrons 
of all great public utilities and the public at large, will consult their 
own interest by overthrowing any political party, which seriously 
aims at Government Ownership in any form. 



IX 

PROSPERITY, CRISES AND DEPRESSION 

A REVIEW OP CRISES AND BOOMS IN THE UNITED STATES, THE FORCES OPERATIVE 
IN EACH CASE, AND THE RESPONSE OF THE STOCK MARKET THERETO 

To make money in security investments, it is essential to know 
approximately, if not precisely, when to buy the stocks and 
bonds of sound and solvent corporations and governments, and 
when to sell them. An attempt will be made in this book to codify 
the rules, which should govern both buying and selling. 

If the reader is a man of impatient temperament and must posi- 
tively know conclusions first, without reference to the facts upon 
which they are based, he can skip a good many pages of this work 
and read the last chapters first. But if he is a man of sound mind, 
and if he should refuse, as he ought to, to take any one's conclusions 
without knowing how he arrives at them, he will be compelled, 
sooner or later, to examine the premises upon which those conclu- 
sions are based. He might as well proceed, therefore, in an orderly 
way, making sure that the ground is firm under his feet as he ad- 
vances. He will then follow the evolution of the writer's argument, 
in the manner in which it is here set forth. 

The broadest and most comprehensive view of the subject is 
afforded by a study of Cycles, which topic has been discussed in a 
preceding chapter. The study of Fundamental Economic Factors 
explains the causes, which operate to bring to pass the Cycles. An 
intimate relation exists between the market values of stocks and 
bonds and the prevalence of good or bad times; and it will greatly 
assist investors to attain a thorough knowledge of the times, when 
successful investors buy and sell, to review rapidly the periods of 
Prosperity and Depression in the United States and the incidents 
of each one. 

107 



108 MONEY MADE IN SECUKITY INVESTMENTS 

CRISIS OF 1791-2 

Trade conditions and money stringency led to America's first se- 
rious reaction and financial panic. Alexander Hamilton, Secretary 
of the Treasury, bought bonds to relieve the situation. Confidence 
was restored, and order brought out of chaos, largely through the 
operations of the first United States Bank, chartered in 1791. 

CEISIS OF 1814 

A decade of prosperity was enjoyed by the States after 1792, partly 
in consequence of the tariff acts of May 2, 1792, and June 7, 1794, 
which levied higher duties on foreign goods. But the War of 1812 
and the embargo and non-intercourse laws finally made trouble by 
almost annihilating foreign trade. From a total volume of $246,- 
843,000, in the fiscal year ending September 30, 1807, foreign trade 
had fallen steadily to $19,892,400 in 1814, the smallest in the whole 
history of the republic, before or since. Exports were less than the 
pitiful sum of $7,000,000. American ships, long so profitable, were 
practically idle. 

The country was extremely dependent upon foreign manufac- 
tures, and these could be had in proper quantity only by smuggling 
through Canada and the ports of New England. The goods were 
marketed by the merchants of Boston, to whom immense sums were 
owing by the rest of the country. In 1814, Boston drew on New 
York and Philadelphia, which were distributing cities, for the cash. 
Those cities called in their money from the sections tributary to 
them. Specie was drawn from the doors of banks in New York and 
Philadelphia, by the wagon load, for shipment to Boston and Can- 
ada. Scarcity of cash in the United States caused general alarm 
and prepared the way for the panic. The United States Bank had 
disappeared in 1811 ; and the State banks had too limited a capital 
to carry the States through the crisis. They were already stagger- 
ing under a heavy load of loans and could do no more. 

When the city of Washington was captured by British troops, 
August 24, 1814, and President Madison took refuge in a Virginia 
forest in a heavy rain, a panic was the quick result. In Baltimore, 
Philadelphia and New York, the banks suspended specie payments, 



PEOSPEEITY, CEISES AND DEPEESSION 109 

August 26 and 31 and September 1, respectively. The banks in 
New England and a few in the West weathered the storm, but in all 
the rest of the country suspension of specie payments was general. 
Hundreds of business firms were wrecked and depression reigned 
throughout the country. Wall Street was affected, of course; but 
trading was limited then to a few varieties of bonds and stocks, and 
the troubles of Wall Street figured to an unimportant extent in the 
universal distress. 

In England, inflation and depreciation of the paper currency led 
to panic and reaction in 1816. 

1819 -END OF THE DEPRESSION 

Hard times lasted for several years. It is true that there was some 
rebound after the panic. Merchants did fairly well. New lands 
were being rapidly settled. A flood of paper money was poured out 
by the State banks, and, after April 10, 1816, by the second United 
States Bank, which gave a stimulus to enterprise and speculation. 
But the moment had not arrived for a general forward movement. 

Manufacturers felt hardship, owing to lack of protection under 
the new and lower tariff law of April 27, 1816. Many went out of 
business, especially the weavers of woolen goods, who could not 
withstand the competition of British mills, enormous quantities of 
whose productions were dumped on the wharves of our sea-coast 
cities for sale at auction. Imports were excessive. The balance of 
trade ran heavily against the United States, amounting in four 
years, ending September 30, 1818, to more than $165,000,000, a 
sum too large to be paid from the rich earnings of American ships. 
It was imperative to pay for the goods, and this evil was soon made 
worse by another. 

Paper money having naturally depreciated, specie was withdrawn 
from circulation. To remedy this trouble, Government and the 
banks united in an effort to lessen the volume of paper money afloat. 
State banks, whose circulating notes were deposited in the United 
States Bank and its branches, were called upon to redeem them in 
specie. Many of them retired a part, or all, of their bills. Accord- 
ing to A. S. Bolles, the volume of paper money was contracted from 
$110,000,000 in 1816 to less than $65,000,000 in 1819. This dras- 



110 MONEY MADE IN SECUBITY INVESTMENTS 

tic proceeding brought on the inevitable collapse in the business 
world, starting in the Fall of 1818. New enterprises were laid 
aside until a more convenient season and many bankruptcies oc- 
curred. Edmund C. Stedman calls this the crisis of 1818. As the 
crisis of 1814 became acute through a panic, so the depression vir- 
tually ended in one. The trouble was caused by the lack of ample 
supplies of money at a time of great national growth. 

CEISIS OF 1826 

After drastic liquidation, economy and curtailment of all new com- 
mitments in business, courage revived; and when better times 
dawned, business men took hold again with characteristic American 
spirit and promptitude. 

A protective tariff enacted May 22, 1824, inspired fresh anima- 
tion in home industry. Imports were cut down, exports were larger, 
and, in fact, during the six years, ending September 30, 1825, they 
nearly balanced, excess of imports being only a trifle more than 
$30,000,000. Money was in ample supply. 

Manufacturing and domestic trade expanded. Public works were 
built on an extensive scale. Labor found good employment. The 
new life in every department of affairs led easily and in the usual 
way to overextension and speculation, always the bane of good 
times. The country went ahead too fast ; and once more the banks 
could not meet all demands for accommodation. When a reaction 
in trade started in England, late in 1825, money stringency ruled 
here and put a stop to all new ventures. In 1826, a crisis occurred 
in the "United States, with many failures, including the Franklin 
Bank and Jacob Barker. In England, the depression was fearful. 

1831 -END OF THE DEPRESSION 

Moderate gold imports after 1826 led to a short revival of con- 
fidence. But the trend was downward for several years. The 
tariff laws were a subject of unending controversy in Congress in 
this period. The South did not want protection to industry; the 
North did. May 19, 1828, a new tariff law revised the schedule of 
duties, raising some and lowering others. On the whole, the effect of 



PROSPERITY, CRISES AND DEPRESSION 111 

this law was neutral, although the controversy over it had been dis- 
turbing. General Jackson was in this period fighting a battle royal 
against renewal of the charter of the United States Bank and a 
reduction of tariff duties was being debated in Congress. In 1831, 
a rush of foreign goods turned the tide of gold outward. The times 
were extremely difficult and enterprise was at a low ebb. By 1831, 
liquidation had ended, a slow improvement began, and the turn had 
come. 

CEISIS OF 1837 

Then" followed a term of six years of halcyon days. This was the 
first era of active railroad building; and by 1837, the twenty-three 
miles of pioneer railroad line of 1830 had grown to 1,497. The 
demand for material and labor for these works proved an immense 
advantage to industry. 

General business also steadily grew better and all classes of pro- 
ducers and traders enjoyed a boom. 

The Clay compromise tariff of 1833, while not stimulating in its 
effects, ended a long dispute in Congress and the uncertainty which 
had prevailed, at any rate ; and although duties were to be lowered 
gradually until 1842, no serious consequences were felt for several 
years. 

As time rolled on without any serious check to the growing op- 
timism of the period, a vast variety of new enterprises were 
launched, and deposit of the surplus revenues in the State banks 
aided in kindling the flames of a wild speculation. Securities at- 
tracted little attention, but a mania broke out for trading in lands, 
ships, agricultural products and manufactures, such as had never 
before been witnessed in this theretofore staid and old-fashioned 
country. It is recorded that prices were paid for city lots, in some 
cases, never afterward known. The famous morus multicaulis 
speculation was an incident of those times, rivalling the historic 
tulip mania in Holland. A furious carnival of trading broke out 
especially in Government lands, payment being made for them in 
State bank notes. That which was bought to-day at any price was 
sold to-morrow at a profit, and exuberant enthusiasm prevailed 
among all classes. 



112 MONEY MADE IN SECURITY INVESTMENTS 

While the times were buoyant beyond previous experience, under- 
lying conditions were changing. Imports were promoted by the 
gradual lowering of duties by the Clay compromise tariff and grew 
to extraordinary figures, and the balance of trade against the United 
States rose from $13,601,000 in 1832 to $52,240,000 in 1836. Gold 
was kept at home by reason of the large earnings of American ships 
and the investment of foreign capital in American railroads and 
other ventures. Indeed, a few millions of gold were imported, every 
year. But the eager demand for money to finance land and every 
other kind of venture kept pace with increased money supplies and 
finally ran past them. Loans expanded steadily at the banks, and at 
one time specie holdings did not exceed 7% per cent of the loans. 

A great fire in New York, December 16, 1835, inflicted serious 
loss on that community and was one influence tending toward the 
final reaction. 

April 10, 1836, the second United States Bank came to a stormy 
end, so far as its Government charter was concerned; but it went 
on for a few years under a Pennsylvania charter and its reckless 
loans did not improve the general situation. Early in 1836, credit 
was almost at the breaking point. 

October 23, 1836, a small panic in Wall Street heralded the com- 
ing crisis. President Jackson did the rest. January 1, 1837, he 
began to call in from the banks the nearly $37,500,000 of the sur- 
plus revenue on deposit among them for distribution to the State 
treasuries. By April 1, half of the amount had been paid in, but to 
meet the payments the banks were obliged to contract loans. The 
country was on the brink of disaster. 

May 10, 1837, a frightful panic broke out in the financial world. 
All the banks suspended specie payments. Prices of stocks, lands 
and goods fell in a twinkling and fortunes vanished in a day. Ex- 
tensive liquidation took place ; and there were over 300 failures in 
consequence of the crash. In New York, J. L. & S. Josephs, agents 
for the Rothschilds, and, in Philadelphia, the United States Bank, 
went down among others. The distress was caused, in a measure, 
and was aggravated, by a partial failure of the crops, high prices for 
grain and necessary imports of breadstuffs. A shortage in the an- 
nual contribution to the wealth of the country from the wheat and 



PROSPERITY, CRISES AND DEPRESSION 113 

corn fields is never a greater calamity than when affairs are trem- 
bling in the balance. 

The crisis of 1837 is generally regarded as a "land panic." The 
prostration in trade lasted for several years. The bank crisis in the 
United States proved disastrous also to England. Insane specula- 
tion had been in progress there, precisely as here, and was ended in 

1837 by panic, reaction and commercial distress. 

1843— END OF THE DEPRESSION 

The turn upward came in 1843, partly through the favorable na- 
ture of the new protective tariff of August 30, 1842, and hand in 
hand with an enormous decline in imports. In 1843, foreign com- 
merce yielded a net balance of $40,392,000 in favor of the United 
States, much the best showing in the history of the country up to 
that time. For fifty-three years previously, there had been a bal- 
ance in favor of the United States ten times only— 1840 having 
been the best year, when excess of exports was $25,410,000. In all 
vocations, depression had been severe. Railroad building was a 
good barometer and had fallen off from 416 miles of new line in 

1838 to 159 miles in 1843. Similar dullness existed in all other 
branches of enterprise. By 1843, liquidation had been completed in 
the business world. 

CRISIS OF 1848 

When" hope finally revived, men of ability gradually found courage 
to embark once more in the work of development. Factories and 
mills began to experience a better demand for their products. Pig 
iron making is always an indication of conditions, and this trade 
flourished in particular, the output rising from 215,000 gross tons 
in 1842 to 800,000 tons in 1848. Trade sprang up and profits were 
large. Railroad building was resumed and went forward with a 
rush. Good times soon reached every city and settlement ; and both 
capital and labor found full employment and reaped a rich reward 
therefrom. 

The War with Mexico had little effect, but the seeds of trouble 
were planted when Congress adopted, July 30, 1846, the famous 
Walker tariff for revenue onlv, in which enactment all duties on 



114 MONEY MADE IN SECURITY INVESTMENTS 

foreign goods were reduced to an ad valorem basis. Industrial 
plants were small in that era and machinery was crude; and the 
makers of iron, steel, textiles and other goods could not withstand 
the competition of the great and more advanced factories in Europe, 
without genuine protection, especially since the new tariff permitted 
enormous undervaluation of imports. A large excess of imports 
soon appeared in our foreign trade and gold was drawn from the 
banks and sent abroad to pay for the goods. 

The activity of business had once more overburdened the banks 
with loans and a loss of specie made trouble. Matters were in shape 
for a reaction. 

In 1847, a great crisis arose in Europe, due to inflated credits, 
fraudulent stock companies and a frenzy of speculation. The reac- 
tion extended to the United States, invaded every part of the coun- 
try and caused a halt and severe liquidation. 



1851-END OF THE DEPRESSION 

The discovery of gold in California by Marshall brought about im- 
proved sentiment, although not at once. Thousands of Americans 
went wild over the prospect of sudden fortunes, however, and 
rushed to the Pacific coast overland, across the isthmus and around 
Cape Horn. Merchants and ships followed to supply their needs. 
American sailing ships enjoyed, at that time, a wonderful pros- 
perity. They had been gradually driving foreign bottoms out of 
the carrying trade; and the rush to California proved an immense 
stimulation of this interest, because the trade from the East to the 
West coast was closed against foreigners, as being of the nature of 
coasting trade. Many voyages were made to California, in which a 
single trip paid the whole cost of the vessel. When it became evi- 
dent finally that the mines were likely to supply fresh capital for 
business operations, railroad building was resumed. In a few years, 
California was actually sending $40,000,000 of gold per annum to 
the East. Whatever there was of doubt in the business situation 
was finally cleared away by a small panic in stocks, August 13, 1851, 
as a result of a break in Erie from $90 a share to $68%. The 
smash was soon succeeded by a genuine revival. 



PROSPERITY, CRISES AND DEPRESSION 115 



CRISIS OF 1857 

A boom in business broke out soon after 1851, in spite of the injury 
to manufactures by the low tariff. Trade had grown with rapid 
strides to keep pace with settlement of the West and the Pacific 
coast. Shipping had reaped a rich harvest in the traffic of the 
Atlantic during the Crimean War, 1854-5, and during the rush to 
California, and the finest clippers in the world had been built for 
the trade to California and Europe. Owners of merchantmen 
added enormously to their fleets in that prosperous period ; and ship 
carpenters were among the best paid of American workmen. 

The construction of new railroads was in full swing between all 
important cities and the miles of new line put into operation an- 
nually had grown from less than 1,700 in 1850 to 3,642 miles in 
1856. What this meant for the iron and steel industry hardly needs 
explanation. 

Good times were universal. Iron, dry goods and all other com- 
modities brought high prices. Wealth was advancing. European 
investors looked with favor on American securities. Every one was 
making money. 

Wall Street discounted the good times in its chronic manner. An 
immense issue of new securities was finding its way into the stock 
exchanges and an active speculation in them was being conducted. 
Rich men were already engaged in the pursuit of greater wealth by 
watering stocks ; and an increase of the capital of Erie from $3,000,- 
000 to $38,000,000 was only one of the financial incidents of the 
period. 

With reference to securities, the top of the boom was touched in 
December, 1856, some time before the actual crisis. December 5th, 
the rise in prices caused the failure of Jacob Little, who had been 
short of Erie more than 100,000 shares. The reaction which ensued 
might have ended in such a moderate downward turn as is usual in 
a bull market, were it not for changes in the credit situation, which 
the excited speculation of 1856 had done much to promote. 

Foreign trade had run steadily against the United States on ac- 
count of the low tariff, and the yet lower tariff, then under discus- 
sion and finally enacted March 3, 1857, promised an aggravation of 



116 MONEY MADE IN SECURITY INVESTMENTS 

the trouble. Investment of European money here, California gold 
and the earnings of the merchant marine did not offset the demands 
of foreign merchants upon our specie supply; and net exports of 
gold ran all the way from $23,015,500 in 1853 to $58,578,000 in the 
fiscal year of 1857. 

Scarcity of cash soon made itself manifest, and when cash hold- 
ings had fallen to about 8% per cent of the loans, it was apparent 
that no more money could be placed at the command either of the 
mercantile community or of speculators. 

There was a trifling improvement in stocks in January, 1857, 
but the high prices for railroad securities, iron and goods of 1856 
were not repeated until long afterward. 

In January, 1857, liquidation set in; and falling prices were 
recorded for months. The tension in the financial world soon 
reached the snapping point. August 24, 1857, the Ohio Life In- 
surance & Trust Company succumbed under the strain of reckless 
loans, official wrong doing and the stringency in money; and the 
crisis had arrived. Wall Street should not have been, but was, 
taken by surprise ; and that busy center has seldom witnessed scenes 
of greater excitement than prevailed during the panic. In New 
York, loans had been in excess of deposits for some time, and while 
that was not an unfamiliar phenomenon in those days of moderate 
banking resources, and while a reaction in stocks was inevitable 
from all the circumstances of the case, the crash would not have 
been so disastrous had not a multitude of intelligent men fallen into 
a senseless panic and by their precipitate action destroyed their own 
fortunes and those of others. A panic is always unreasoning, but 
there is this to be said in justification of the fright, which swept the 
business world, that the banks had reached the limit of their ability 
to finance merchants and speculators ; and the smash was promoted 
by a coterie of speculators, who had foreseen trouble and gone short 
of stocks and whose profits were dependent upon exciting a frenzy 
of alarm. From the first of the year to October, good stocks dropped 
between $40 and $60 a share. Scores of business men were ruined 
by the reaction. There were runs on the banks and in October a 
number of them suspended. Erie, Michigan Southern and Illinois 
Central went into the hands of receivers. 



PROSPERITY, CRISES AND DEPRESSION 117 

The depression in business circles lasted practically for four 
} T ears. Stocks appreciated in value, as above noted, in the early 
part of 1857, but after that, there was liquidation until 1858. 



1861— END OF THE EEACTION 

Dullness reigned in many important fields of enterprise after the 
terrible panic of 1857. All new work was stopped and falling prices 
and stagnation were experienced throughout the country. Iron fell 
more than $9 a ton from 1856 to 1861. Railroad building received 
a staggering blow and fell from 3,642 miles of new line in 1856 to 
651 miles in 1861. There was less demand for the output of the 
textile mills and thousands of men were out of work. Some small 
improvement appeared in 1860 but it was short lived. 

In consequence of political dissensions in the United States, a 
turn for the worse occurred in May, 1860. Threats of secession 
were being made by fiery orators in the South, if a Republican 
President were elected in the Fall ; and this brought about a serious 
state of affairs. Several }^ears of frugality and careful management 
had led to more healthy business conditions, when this situation 
was reversed by the difficulty of making collections in the South 
which impaired the credit of many Northern merchants. President 
Lincoln was elected in November, 1860, as a result of the splitting 
up of the Democratic vote among three Democratic candidates, 
and the situation then became acute. Stocks fell between $7 and 
$16 a share in a month's time. For the first time in its history, 
the New York Clearing House was forced to issue loan certificates, 
November 23, 1860, to the amount of $7,375,000, to carry the banks 
through the monetary stringency. 

After a rally in December from the low prices of 1860, stocks 
dropped until April, 1861, when there was a sudden semi-panic, 
caused by the firing on Fort Sumter and the outbreak of hostilities. 
From the low prices, then made, stocks rallied for three years. 

A powerful influence in favor of the improvement which then set 
in was the Morrill genuinely protective tariff, enacted March 2, 
1861. Another was the new source of wealth, discovered in Penn- 
sylvania, in the form of petroleum. 



118 MONEY MADE IN SECURITY INVESTMENTS 

A second issue of loan certificates, amounting to $22,585,000, was 
made by the New York Clearing House, beginning September 19, 
1861, and this carried the banks through to better times, in spite of 
the general suspension of specie payments, December 28, 1861. 

CEISIS OF 1864 

Events moved swiftly during the Civil War. The formation of a 
large army in the North and its march to the South created a de- 
mand for supplies and breadstuff s, while the shipment of troops 
and munitions to different parts of the country added to railroad 
earnings. 

A strong impulse had been given to manufactures by the Morrill 
tariff and the requirements of the army; and hundreds of tons of 
pig iron, which had been stacked in the yards of the furnaces, for 
years, were bought by the mills at prices which dazzled the mind 
and enriched hundreds of men. Pig iron rose $55 and $60 a ton 
from 1861 to the Summer of 1864. All other commodities sold at 
high prices. In 1862, a great bull market in stocks began and 
prices rose excitedly, with scarcely a halt the whole year. 

An effective cause in this wild whirl upward in prices was the 
issue of $431,000,000 of greenbacks by the Government and the ex- 
pansion of paper money circulation from $207,000,000 in 1860 to 
$833,719,000 in 1864. 

Trade was extremely active. Wages were high, as might have 
been expected after a legion of young men had left the farms and 
workshops and gone away to the front. Every one who had not 
shouldered a rifle to fight the battles of his country made money, as 
never before in his life. In Wall Street, in manufactures, army 
contracts and trade, fortunes rolled in upon thousands of men ; and 
money was spent with open handed prodigality. 

Speculation required the use of such unheard-of sums of cash, 
that the banks in New York were forced, for the third time, to 
resort through the Clearing House to loan certificates, $11,471,000 
being issued, dating from November 6, 1863, to relieve the strain 
on credit. 

In the Spring and Summer of 1864, stocks were bulled to ex- 
traordinary prices. Top of the boom was actually reached in April, 



PROSPEKITY, CRISES AND DEPRESSION 119 



although a few securities went higher in June. Everything on the 
list was from $70 to $80 a share higher than in April, 1861, and 
the speculative favorites from $100 to $189 a share. Delaware & 
Hudson had felt the enormous demand for anthracite coal and was 
manipulated to $254 a share. Erie for the same reason rose to $126 
and Reading to $165. Except in the case of Reading, those prices 
have never been seen since in the fifty years which have now elapsed. 
In June, Harlem was cornered by Commodore Yanderbilt and went 
to $285 (a price, singularly enough, the same to which gold was 
forced in July, the highest quotation for the metal). Harlem went 
off the list of the Stock Exchange for several years and did not sell 
at 285 again until 1896. Michigan Central touched $157 and ever 
thereafter until 1891 ranged below that figure. In looking over 
the record of 1864, one finds a number of other stocks, which sold at 
prices not again equalled for a whole business generation. As for 
the market, as a whole, taking the average of the trading stocks, it 
required forty years to reach once more the high level of 1864. 

The speculative revel went madly on, even while the money mar- 
ket was working into a dangerous position and when every cau- 
tionary signal of finance pointed to a certain, early and frightful 
collapse. Grim and relentless war was raging in all the border 
States, pain and sorrow had entered thousands of homes, the public 
debt was running up into the billions. But swept away by the wild 
enthusiasm of the times, speculators and business men believed the 
boom would last forever. 

Paper money inflation had been steadily expelling gold from the 
United States; and net exports of the precious metal during the 
fiscal year of 1864 were $89,484,800, the heaviest in recollection. 
Foreign trade was running strongly in favor of Europe; and an 
adverse balance of $157,600,000 was rolled up against us in 1864, 
which also broke all previous records. Money worked close again, 
as was natural ; and a fourth issue of loan certificates was resorted 
to, in New York, dating from March 7, 1864, and amounting to 
$17,728,000. 

When the break in Wall Street finally came, the immediate cause 
was a reaction in Fort Wayne stock. That security had been bulled 
in the interest of Anthony W. Morse from $82% in January to 



120 MONEY MADE IN SECCJKITY INVESTMENTS 

$152% in April, and, after the failure of Mr. Morse, April 18th, it 
fell suddenty, declining to $47% by May. The pools were taken 
aback by this performance; and while they did not relax their 
efforts on the bull side for a month or two, yet manipulation was 
no longer effectual, and a bear market set in during June, which 
lasted for several years. More than one cause contributed to the 
result, but the excessive loans at the New York banks, and the high 
premium on gold, were two of the most important. The scarcity 
and high price of gold, then of almost more consequence than high 
rates of interest on money, combined with other adverse influences, 
caused a semi-panic in the Fall, and stocks fell violently until well 
along in October. After a moderate rally, they then went lower; 
and by the Spring of 1865, leading stocks had declined from about 
$40 to $80 a share. Delaware & Hudson had fallen $121. 

Heavy losses were incurred by hundreds of speculators; and the 
reaction extended to the country at large. After 1864, the broad 
trend of the stock market was downward for 13 years, namely until 
1877. Short lived bull markets prevailed from time to time, but 
every new decline carried the level of market values lower and lower 
until 1877. Trade and manufacturing also enjoyed recoveries and 
booms from time to time, but these also were not of long duration. 

1867— LOW POINT OF THE DEPRESSION 

After the passionate excitement and reckless speculation of the 
Civil War period, calm ensued for two or three years. The country 
had been exhausted by the long and cruel conflict ; and the financial 
debauch was over for the moment. President Lincoln had been 
assassinated. A million of men had gone back from the armies in 
the field to their old homes or to new ones in the West. Iron and 
other manufactures had been depressed by a sudden ending of the 
war demand for ships, arms, munitions and supplies. Contraction 
of the paper circulation was in progress, the volume being reduced 
from $983,300,000 in 1865 to $827,000,000 in 1868. A brief period 
of rest and adjustment to new conditions was imperative. 

Stocks rallied to some extent in 1865, as usual after an abrupt 
decline, but underlying conditions were not favorable to an imme- 
diate resumption of the bull market. Imports were heavy; and in 



PROSPERITY, CRISES AND DEPRESSION" 121 

the fiscal year of 1866, gold went abroad in the amount of $63,001,- 
000, next to the most serious outward movement on record. Stocks 
fell off again in the Spring of 1866. May 11th, 1866, Overend, 
Gurney & Co., of London, failed, precipitating a sudden panic at 
that center and a depression which had no little sympathetic effect 
here. Writers refer to this chapter of finance as the Crisis of 1866. 
Practically, it marked a turning point here. After a rally, and one 
more reaction in the Spring of 1867, the trouble was ended for the 
time being. Twenty selected stocks had fallen an average of $58 a 
share from the high prices of 1864, and individual stocks had de- 
clined from about $40 to $130 a share. The collapse in England 
caused two thirds of the speculative stock companies there to go out 
of business. 

In 1867, large fortunes were brought to the support of stocks and 
general business and better times prevailed for several years. Every 
burst of business activity, however, and the requirements of the 
railroad companies called for every dollar the banks could loan and 
the burden was borne with difficulty. 

CRISIS OF 1873 

Improvement, once begun, went forward rapidly. Railroad build- 
ing, which had fallen to 738 miles of new line in 1864, grew to 
7,379 miles in 1871. The protective tariff was working out good 
results ; and while stimulating production, it had given the country 
the advantage of moderate prices for iron and other goods. A 
genuine boom soon manifested itself, especially in iron and steel. 
Mills and shops of every description were rushed with orders. No 
workman was denied who sought a market for his services. New 
lands were being settled, partly by veterans of the war. A number 
of fortunate crop years added to the wealth of the States. Produc- 
tion of the five principal grain crops in the United States had risen 
from an aggregate of 1,308,370,000 bushels in 1867 to 1,656,198,- 
000 bushels in 1872; cotton, 2,233,000 bales in 1866 and 3,874,000 
bales in 1872. In the fiscal year of 1873, exports had passed $522,- 
000,000, which was more than thrice the amount of the last year of 
the Civil War and the greatest business the country had ever done 
up to that time. 



122 MONEY MADE IN SECUEITY INVESTMENTS 

The rebound in stocks from the low levels of 1866 and 1867 was 
vigorous and ran on unchecked until the Summer of 1869. A few 
stocks went higher in 1871 and some others in 1872. The real 
culmination of the bull market was in 1869, when high priced rail- 
road shares were from about $30 to about $100 higher than during 
the depression. The coal shares were exceptions ; they hung heavy 
and some of them were actually lower. The period from 1869 to 
1872 was one of distribution. General prosperity was unchecked 
until 1873 but stock speculation drooped. A variety of untoward 
events occurred. 

Black Friday panic, September 24, 1869, caused by a corner in 
gold, sent stocks tumbling, led by a decline in gold from $162y 2 to 
$133. Clearings at the Gold Exchange Bank were so entangled and 
confused that the bank went into the hands of a receiver and its 
doors were closed for several days. Many failures occurred in Wall 
Street and hundreds of business firms were crippled or obliged to 
wind up their affairs. 

The Chicago fire, October 9, 1871, and the Boston fire, November 
11, 1872, each caused a heavy waste of invested capital and a break 
in stocks. 

In spite of all disasters, the stock market was measurably strong 
until 1872. Not only were powerful cliques energetic in sustaining 
prices until they could sell their holdings, but extra dividends were 
voted by railroads, the most unheard of watering of stocks was 
announced from time to time, and a few important consolidations 
were effected, like that of New York Central with Hudson Eiver, 
all contributing to awaken hopes of higher prices yet to come. 
Eivalry in the buying of shares for control added to the excitement. 
A number of desperate battles were fought in Wall Street between 
rival factions. Corners were engineered, one after another; and 
there were three on one day, September 17, 1872, yet remembered 
as the "day of three corners." 

While the trend of stocks was downward, business remained in a 
healthy condition. Business men were doing extremely well, crops 
were good, and pig iron production in 1873 rose to 2,560,900 tons, 
so far the high water mark in that industry in America, while the 
price had risen over $20 a ton by the Fall of 1872. 



PROSPERITY, CRISES AND DEPRESSION 123 

Various influences had come into play, meanwhile, to weaken the 
credit situation. Reckless overtrading in Wall Street invariably 
adds to the weight of other forces in this direction. In spite of 
enormous grain exports, the United States had been buying foreign 
goods in even greater quantity ; and gold had been going to Europe 
at the rate of from $21,000,000 to $63,000,000 a year since 1867. 
Bank reserves were low, and scarcity of cash caused a money flurry 
in September, 1872. Loans were made at % per cent a day and 2% 
per cent was paid for carrying Erie stock. Later in the year, the 
market was unsettled by a break in Chicago & North Western. The 
Woodward party had bought and cornered that stock, driving the 
price from $68% in October to $230 in November, but the corner 
failed almost at the moment of success and the stock broke to $81% 
in December. A semi-panic ensued, with many failures. For a 
short time, the banks stopped the issue of weekly statements of their 
condition. 

Changes in the laws levying duties on foreign goods played a part 
in the depressing influences of those times. July 14, 1870, the 
Schenck tariff was enacted, as a first step toward reducing the high 
duties of the war period. The changes were not particularly im- 
portant but they were all in the direction of lowered duties. June 
6, 1872, the Dawes tariff became a law, enacted in response to 
violent clamor from the agricultural sections of the Union against 
high duties. A straight 10 per cent reduction was ordered in all 
the principal schedules of the law. This act was a shock to the 
manufacturing world and helped bring on the panic of 1873. 

Early in 1873, money worked close again. Call loans could not 
at times be made for less than 7 per cent, with % per cent a day 
commission added. Bankers charged % to 1 per cent a day for 
carrying stocks. Time loans went to 12 per cent. The crisis was at 
hand, promoted by the overbuilding of railroads. 

The public, already nervous, was startled on April 26, 1873, by 
the failure of the Atlantic Bank; and then began a financial and 
commercial panic, which was due entirely to the excesses of the 
previous five years. The echoes and consequences of a panic in 
Vienna, May 9th, growing out of reckless speculation in doubtful 
securities, made matters worse here. Frantic selling of stocks began 



124 MONEY MADE IN SECURITY INVESTMENTS 

at the New York Stock Exchange and prices crumbled away, week 
after week, without more than one brief pause in the Fall. Sep- 
tember 8, 1873, the New York Warehouse Company succumbed. On 
the 17th, the New York Midland became bankrupt and Jay Cooke & 
Co. failed on the 18th. This last calamity capped the climax. 
Fright and excitement swept the whole country. In Wall Street, 
pandemonium reigned. So terrible was the panic, that the Stock 
Exchange took the perfectly unprecedented action of closing its 
doors on the 20th, not to reopen them until the 30th. Time loans 
were 15 to 24 per cent in October and call money was 7 per cent, 
with 14 per cent a day added. For the fifth time, the New York 
Clearing House issued loan certificates, dating from September 22, 
1873, in the amount of $26,565,000. With a view to relieve the 
tension to some extent, the United States Treasury reissued about 
$26,000,000 of greenbacks, there being slender warrant in the law 
for this action. 

The smash in stock prices ended in November and a great rally 
followed. But the financial storm had wrecked many fortunes and 
thrown a number of banks and hundreds of business men into 
bankruptcy, as well as the Northern Pacific and the New York, 
Chicago & St. Louis railroads. It is said that seventy-nine members 
of the New York Stock Exchange failed during the panic. In the 
country at large, failures among business men grew more numerous, 
every year thereafter, until 1878, inclusive. 

The Credit Mobilier investigation intensified the general uncer- 
tainty. 

1877— END OF THE DEPRESSION 

The reaction in business lasted until the latter part of 1876 and in 
some lines until the Summer of 1877. Pig iron making fell off 
from 2,560,900 tons in 1873 to 1,868,900 tons in 1876; and there 
was no important recuperation in price until 1878, when there had 
been a fall of about $40 a ton from the high prices of 1872. New 
miles of railroad constructed dropped from 7,379 in 1871 to 1,711 
miles in 1875. In all other vocations, dullness, lower prices and 
smaller profits were reported. 

January 14, 1875, President Grant signed the bill, pledging the 



PROSPERITY, CRISES AND DEPRESSION 125 

Government to resume specie payments on the 1st of January, 
1879, and while this was a reassuring incident, its good effects were 
not felt immediately. 

March 3, 1875, the horizontal 10 per cent reduction in the tariff 
law of three 3 r ears before was repealed. This repeal inspired fresh 
courage in manufacturers and exerted a most happy effect upon 
business. 

Men of large means were greatly disturbed during this period 
by the so-called granger laws of several Western States, which aimed 
a hard blow at the railroads in the interest of farmers and sought 
to regulate and reduce freight rates. Partly in consequence of these 
laws and also as a sequence of the hard times and loss of freights, 
all agreements as to rates came to an end between railroad and coal 
companies; and open wars broke out between several important 
systems. Slackening of traffic had already impaired earnings and 
the damaging competition of 1875 and 1876 cut them down yet 
more. Commodore Vanderbilt died, January 4, 1877, and a trunk 
line agreement which he had brought about a month or two before 
was abandoned. Loss of earnings sent Central of New Jersey into 
the hands of a receiver in February; and Reading was obliged to 
apply to creditors for concessions. 

The trend of business was unmistakably downward in this period, 
and a strong bear party came into existence in Wall Street and its 
untiring attacks caused prices (after a rebound from the bottom in 
1873) to reach a lower level in the Spring of 1877, than for the 
previous sixteen years. The last drive in the month of June ended 
the reaction in the stock market. Taking the whole body of active 
stocks, all the gain since 1860 had been wiped out; the average was 
lower than then ; 20 selected stocks had declined $76 a share since 
1869 and individual stocks were down from $14 to $116 a share, the 
high priced ones the most. A change in outside conditions was then 
ushered in. Call money was remarkably low, the trunk line rail- 
roads made a new agreement in June, and such evils as prevailed in 
the business community seemed near their end. The turn had 
come. A powerful speculative combination was formed in Wall 
Street and the buying of stocks for a bull campaign began. 



126 MONEY MADE IN SECURITY INVESTMENTS 

CEISIS OF 1884 

Better times trod upon the heels of 1877. Confidence returned 
slowly, indeed, but it did return; and the tide of prosperity rose 
steadily until its inspiration had penetrated every city and hamlet 
in the country. The fertile lands of the West and South brought 
forth bountiful harvests, and ocean commerce expanded under the 
stimulus of good crops. The excess of American exports was only 
one of the features of this golden period in our affairs, which broke 
all records. During four years, ending June 30, 1881, foreign trade 
yielded an average balance of more than $230,000,000 per annum 
in favor of the United States, a marvel to which our people were 
not then accustomed. 

A number of new railroads were required; building broke out 
afresh and once more surpassed all precedent, the miles of new line 
rising from 2,665 in 1878 to 11,569 in 1882. The transportation of 
materials for railroad contractors and a larger volume of goods and 
grain led to a striking improvement in the earnings of all lines. 

Meanwhile, mills and factories were busy, and furnaces could 
hardly meet with promptitude the orders for metal. The tonnage 
of pig iron turned out in 1882 was the enormous total of 4,623,300, 
or nearly three times the record of 1876. In the sale of goods, 
merchants reaped large profits. Farmers were paying their debts. 
Energy pervaded the entire commercial world. The mines were 
taxed to the utmost and the output of coal was nearly twice that of 
the dull years which preceded the boom. 

Betterment in the stock market was delayed by strikes and riots 
at Pittsburgh and elsewhere in 1877, but the time was ripe for a 
bull movement in stocks and after a few months the bull party had 
the situation under control. Stocks began their rise in the Spring 
of 1878. In 1879, men of means awoke suddenly to the fact that 
railroads were of value as investments after all and a marvelous 
buying of securities sprang up, which electrified the financial world 
and led to a boom in prices. A powerful factor in behalf of higher 
prices was the undoubted fact, that the heart-breaking wreck and 
reconstruction of corporate finances had been finished for the time 
being. Rate wars had ceased and earnings were on the upward 



PROSPERITY, CRISES AND DEPRESSION" 127 

grade. Money was fairly low, barring the customary flurries at the 
planting and harvest seasons; and time loans could be negotiated 
at an average of 4 to 5 per cent. As soon as the boom started, there 
was no hesitation on the part of investors and traders. Orders to 
buy poured into every brokerage office in a flood ; and brokers were 
in danger of being utterly swamped with business. Stocks rushed 
upward with a whirl until November. In 1880, especially, the stock 
exchanges were the scenes of furious trading, such as brokers had 
never witnessed. Fortunes were made by every one connected with 
Wall Street. Scarce a cloud flecked the sky for two or three years, 
and the swelling tide of the boom rolled on practically unchecked 
until 1881. A number of striking railroad consolidations were ar- 
ranged by Jay Gould and others. The buying of stocks for control, 
stock dividends, rights on new issues and strong manipulation by 
operators, promoted speculation and kept it at the boiling point. In 
1880, stock dividends were declared to the amount of more than 
$40,000,000. 

The good times were not allowed to pass without a few unfor- 
tunate incidents, however, among them being a receivership for 
Reading, May 24, 1880, and a strong speculative shake out in 
stocks in that month. 

Activity in Wall Street and general business circles was exhib- 
ited by the circumstance, that, throughout the whole of 1880, re- 
serves were extremely low in the New York banks. But gold began 
to flow in from Europe and in the fiscal year of 1881, all records 
were broken by a net importation of $97,000,000 of that coin. 

The boom in stocks culminated in May and June, 1881. Shares 
had then risen, in some cases $40 and in others as high as $120, 
averaging about $60, from the low prices of 1877. After the shoot- 
ing of President Garfield, July 2, 1881, stocks did not rally back to 
the high level of the Spring in more than a few exceptional in- 
stances. For particular reasons, a few did go higher in 1882. 

A direct cause of the halt was undoubtedly the enormous issue of 
new stocks and bonds, put forth as a consequence of the marvelous 
increase in miles of railroad line in operation and the union of old 
companies. The market was overweighted with those securities. 
All were pressing for sale; and some of them held out no hope of 



128 MONEY MADE IN SECURITY INVESTMENTS 

an income to the owners for years ahead. Another source of dis- 
turbance was a partial failure of the wheat and corn crops in 1881. 
Aggregate production of the five leading grain crops was 2,703,- 
575,000 bushels in 1880, and only 2,056,543,000 bushels in 1881. 
Rate wars again blasted the hope of larger earnings in the latter 
half of 1881 ; and freight was carried by the trunk lines from the 
West to the seaboard at rates which barely paid the cost of trans- 
portation. Exports of American produce began to fall off. Gold 
not only ceased to come into the country, but on the other hand 
went out. 

Every effort was made to neutralize the effect of less favorable 
conditions; and leading men, like Mr. Vanderbilt and Jay Gould, 
managed to lift prices somewhat in 1882. Large fortunes were 
brought to the support of the market. March 13, 1882, Mr. Gould 
made his famous exhibit of securities to a few friends, spreading out 
before them about $50,000,000 of stocks and offering to show them 
$30,000,000 of bonds. No efforts, however spectacular, sufficed to 
stay the downward trend in Wall Street. In the Fall of 1882, money 
ran up to 20 and 25 per cent, and once to 30 per cent, for call loans. 

By this time, the public had become seriously alarmed. Thou- 
sands of men opened their eyes to the fact that they were loaded 
with stocks and bonds, which could not be sold at a profit and were 
not worth keeping as investments. Liquidation set in; and this 
selling imposed a burden upon the market too heavy to be sustained. 
A heavy shrinkage in values took place ; and in the Fall of 1882, a 
number of stocks reached the lowest prices known for more than a 
year. 

Confidence was greatly unsettled by this decline; and although 
the earnings of some of the railroads were good yet nothing sufficed 
to stay the liquidation. 

New and troublesome factors came into play in 1883. A revised 
tariff law of March 3, 1883, framed by the advocates of protection 
but in substance a compromise with the friends of revenue duties, 
deranged the iron and textile trades and general business slackened. 
Prices of commodities fell, iron leading the way. Another of the 
disturbing influences of the time was the fact that some of the new 
railroads were exact parallels and competitors of the older systems. 



PROSPERITY, CEISES AND DEPRESSION 129 

The crisis arrived in 1884. In January of that year, Henry Vil- 
lard, and in April, James R. Keene failed. In May, in quick suc- 
cession, came the suspensions of the Marine Bank, Grant & Ward, 
and the Metropolitan Bank, coupled with startling revelations of 
fraud, which stunned the public mind. Brokers and traders were 
frantic ; and a panic took place, memorable not only for its violence 
but because the prestige of General U. S. Grant, the idol of the na- 
tion, was involved in the ruin of Grant & Ward. First class stocks 
were thrown overboard and sacrificed, equally with the weak ones, 
and prices declined from $17 to $54 below the levels at which they 
had sold a few months before. In the midst of the excitement, May 
11, 1884, the New York Clearing House lent its strong support to 
the financial community by a sixth issue of $24,915,000 of loan cer- 
tificates. 

During the latter part of 1884, the trunk line railroads again 
went to war with each other and cut rates heavily, making matters 
worse. 

It is to be noted that the panic was the direct outgrowth of three 
years of declining prices. Loss of confidence in various great mag- 
nates of finance had slowly driven thousands of men out of the stock 
markets. Their buying no longer lent support. 

1886-END OF THE BEACTION 

Bottom was touched in the stock market in June, 1884. In three 
years, many active stocks had fallen from $30 to $75 a share and 
Union Pacific was down $103. A few stocks went lower in the early 
part of 1885 but the market at large was then on the road to recov- 
ery. Traders were discouraged, however, and sales on the New 
York Stock Exchange ebbed from more than 117,000,000 shares in 
1881 to 96,000,000 in 1884 and 93,000,000 in 1885. Nevertheless, 
in 1884, the foundations were laid for a bull market, lasting until 
1890. 

The setback in business was of short duration. It ended in 1886. 
So brief and trivial was the revulsion, that it might almost be said 
there was none. 

Liquidation brought its usual panacea for the woes of Wall Street 
and the financial world, in the form of easy money. Call loans 



130 MONEY MADE IN SECUEITY INVESTMENTS 

fluctuated between 1 and 3 per cent, as a rule, during the whole of 
1884 and 1885. 

In stocks, there was a good rally in August, 1884, and then while 
business men were taking breath and examining the grounds for 
taking hold again, dullness and sagging prices prevailed for six 
months or more. Easy money and low rates of interest finally en- 
couraged some tentative buying of stocks for a rise. In June, 1885, 
a mysterious buying of Yanderbilt stocks and West Shore bonds 
began to be noticed, which really foreshadowed the absorption of 
West Shore by the New York Central and the formation of a new 
pool among trunk line roads for maintenance of rates. A sharp 
advance in stocks took place, running on into November, and this 
initiated a sustained rise, which did not end until the disastrous 
year of 1893. 

William H. Yanderbilt died December 8, 1885, but the effect on 
stocks was limited. 

The progress of good times was interrupted briefly in 1886 by 
fierce strikes in New York, Chicago and elsewhere, accented by the 
bomb outrage in Chicago, May 4th. There was also a sharp reac- 
tion on account of agitation in favor of the proposed Inter- State 
Commerce Commission bill, when Congress met in December. Gold 
exports in 1886 were not a cheerful feature. But underlying condi- 
tions had grown better. Magnificent crops, fresh imports of gold, 
a revival of railroad construction, and new life in the iron and coal 
trades inspired the public finally with courage; and the bears in 
Wall Street became uncertain of their position. 

CRISIS OF 1893 

Improvement in the times was aided by harmony among the rail- 
roads, defeat of successive bills in Congress aiming at a lower tariff, 
and the concerted work of bankers and financiers. 

In 1887, there were added to the railroad systems of the country 
12,876 miles of new line; and this record has ever since remained 
the high water mark of railroad building in the United States. A 
noteworthy incident on February 2, 1887, was enactment of a law 
"to regulate commerce," creating the Inter- State Commerce Com- 
mission and forbidding rebates, preferences and pools among the 



PROSPERITY, CRISES AND DEPRESSION 131 

railroads. The act was not harmful at the time, but was made 
more drastic by amendments in subsequent years. 

The bull market worked gradually upward after 1885. In 1887, 
a number of sensational movements in stocks enlivened Wall Street ; 
and August 11th of that year marked the finish of Henry S. Ives, 
who failed, to the delight of every one else in the financial com- 
munity. 

There were the inevitable setbacks, peculiar to every bull move- 
ment, no unfavorable circumstance being allowed to pass without 
an impetuous drive at stocks by men like James R. Keene, whose 
talents shone the brightest in a bear campaign. In 1888, St. Paul 
passed its dividend, and a sharp slump in prices resulted. January 
10, 1889, J. P. Morgan finally effected the famous "gentlemen's 
agreement" between trunk line officials as to rates ; and there was a 
good recovery in prices. 

The bull market culminated with the Spring rise in 1890. A 
swarm of troubles then cropped up. A partial failure of the har- 
vests and various corporate receiverships were among them. In 
July, Congress passed the act for monthly purchase of 4,500,000 
ounces of silver and redemption of silver notes at the Treasury in 
gold. The since famous Sherman Law or anti-trust act entitled "an 
act to protect trade and commerce against unlawful restraints and 
monopolies" was signed by the President, July 2, 1890. While 
lightly regarded for several years, this law has since become an 
instrumentality of great disturbance in the business world. In the 
Fall, the Democrats swept the country. To leave nothing lacking, 
the Baring banking house in London suspended in November. Be- 
fore this last disaster, heavy foreign selling of American securities 
had mysteriously broken out, due to a fear that the United States 
could not maintain the gold standard, to financial troubles in 
Buenos Ayres and to private knowledge in London of the Baring 
embarrassment. Gold was heavily exported, money grew scarce in 
New York, and the Clearing House was compelled to issue $16,645,- 
000 of loan certificates to sustain the banks. 

One influence, which later proved extremely favorable to the busi- 
ness world, came into play at this time, although its beneficial effects 
were entirely eclipsed for the moment by the predominance of un- 



132 MONEY MADE IN SECURITY INVESTMENTS 

favorable factors. This was the enactment, after a prolonged con- 
troversy, of the McKinley protective tariff law of October 1, 1890. 

November 15 th, when the startling news of the Baring failure 
reached New York, a panic burst forth in Wall Street, the break in 
stocks being urged furiously by a bear party, having James E. 
Keene as its leader. The break was soon over and December saw 
prices mounting again rapidly. But the drop had cancelled more 
than half the rise since 1884. The life was gone from the bull 
movement. Some good stocks did not return to the high prices of 
1890 for years afterward. 

In spite of every setback, the bull party persisted until 1892 in 
an effort to put the market higher. Some stocks had not had their 
proper rise ; and a number of them made their highest quotations in 

1892. By the Spring of 1892, leading stocks had risen from $12 to 
$30, or $50 to over $100 a share (according as they were the low or 
the high priced favorites) from the level of 1884. But the two 
years of 1891 and 1892 were devoted entirely to distribution. Sag- 
ging prices were the rule ; and after the moderate January rise of 

1893, even the dullest mind was aware of the fact that the bull 
market had ended and that much lower prices were ahead. 

The Crisis of 1893 was indicated by nearly all the customary 
factors. The times had been good. The McKinley protective tariff 
had stimulated manufacturing. Every vocation flourished. For- 
tunes had been acquired ; and money was being spent with reckless 
and even vulgar ostentation. Wealth had been added to by an enor- 
mous sale abroad of American produce; and exports had passed 
the billion dollar mark in 1892, for the first time in history. Then, 
the current of commerce changed. From an excess of exports of 
$202,875,000 in 1892, the balance of trade dwindled, and in 1893, 
there was an excess of imports of nearly $19,000,000. Mr. Cleve- 
land was elected President in November, 1892, and Jay Gould died, 
December 2d. The silver purchase law had excited serious fears 
that the United States could not maintain gold payments ; and, as 
the Democrats had come into power at Washington, every man of 
political experience fully expected a speedy downfall of the protec- 
tive tariff. The situation was full of dangers. The banking situa- 
tion was strained. Prudent men in Europe were selling their 



PEOSPEEITY, CEISES AND DEPEESSION 133 

American securities. As payment for this flood of foreign liquida- 
tion could be made only in gold (in view of the disappearance of a 
favorable balance in the foreign trade), there was shipped abroad in 
the fiscal year of 1893, net, $87,506,000 of gold, a sum only once 
before exceeded in our history. The drain upon banking resources 
forced the calling of loans in December, 1892 ; and rates for tem- 
porary accommodations rose to 25 and 40 per cent. Conditions 
were ripe for a swift rending asunder of the speculative structure, 
which had been reared with so much labor since 1884. 

The crash came, soon after the collapse of the McLeod deal in 
Eeading, February 20, 1893, and the bankruptcy of the company. 
Eeading fell $22 a share within a week. In March, Mr. Cleveland 
was inaugurated and attacked monopolies in his address. The 
banks began to call loans again and interest ran up to 60 per cent. 
A genuine currency famine prevailed. The strain in financial cir- 
cles was terrific. May 4th, National Cordage went into the hands 
of a receiver ; and next day, S. V. White announced his inability to 
meet his obligations. Panic reigned in Wall Street and there has 
seldom been a more precipitate decline in stocks than ensued, last- 
ing three months. Good stocks fell rapidly and bad ones more 
swiftly yet. The big men were out of stocks and did nothing to 
support the market. In June, an old time remedy was called into 
play; and the New York Clearing House made its eighth issue of 
loan certificates, a total of $41,490,000. In other cities, the Clear- 
ing House banks took a similar course to relieve the tension. The 
stock market steadied itself in July and the worst was over so far 
as securities were concerned. The losses, ruin and distress in the 
country at large were, however, heartrending and almost indescriba- 
ble. Failures were announced, day after day, in nearly every State, 
and many banks went down. The trouble was world wide and great 
banks also failed in Italy and Australia. May the United States 
never again pass through such an awful experience as was furnished 
by the years from 1893 to 1896 ! 

The blight upon business is illustrated by the record of commer- 
cial failures, which numbered 10,344 in 1892 and 15,242 in 1893, 
liabilities in the first named year being $114,000,000 and in 1893 
over $346,000,000. Scarce one business man escaped unscathed. 



134 MONEY MADE IN SECUEITY INVESTMENTS 

About one fourth of the railroad mileage of the United States 
went into the hands of receivers. Beading, Atchison, Erie, Union 
Pacific, Northern Pacific, and New York & New England were 
among the bankrupt roads. 

One favorable outcome of 1893 was the repeal of the silver pur- 
chase law, at a special session of Congress, called by Mr. Cleveland 
for that purpose. 

1896— END OF THE DEPEESSION 

The years of 1894 and 1895 constituted a period of great gloom. 
Production of the five leading grain crops had been declining for 
three years, falling from an aggregate of 3,528,919,000 bushels in 
1891 to 2,423,201,000 bushels in 1894. The benefits of the repeal 
of the silver purchase law were nullified only too soon by agitation 
for demolishing the protection of the tariff to manufactures. The 
Wilson tariff, in fact, was enacted on August 27, 1894, and the 
friends of home industry were despondent. Sentiment was farther 
depressed in the Summer of 1894 by the strike at Pullman, 111., and 
the crimes and outrages perpetrated by the unions and the march of 
Coxey's army of tramps to Washington. The iron and steel trades 
suffered a serious reaction ; and times were hard everywhere. Kail- 
road construction was at a low ebb, in consequence of previous 
reckless overbuilding ; and a smaller mileage was added to the lines 
in operation, in each year, until, in 1896, the total of new construc- 
tion was only 1,654 miles.' 

A deficit in Government revenues soon occurred and therefrom 
sprang a fresh cause of alarm. The Treasury began to be appre- 
hensive lest it should become necessary to encroach upon the $100,- 
000,000 gold reserve for ordinary expenses of the Government. By 
January, 1895, in spite of sales of bonds to replenish the gold re- 
serve, the Treasury stock of the coin had fallen to $44,000,000. No 
sooner would the gold reserve be recruited to a proper point than 
withdrawals would commence again, the coin being taken out in 
exchange for greenbacks. The gold standard was once more in 
danger. In January, 1895, a virtual run on the Treasury set in; 
and gold went out at the rate of $3,000,000 a day and $30,000,000 
not required for export was taken out. Hoarding of the metal by 



PROSPERITY, CEISES AND DEPRESSION 135 

banks and private citizens began. This was so serious an evil that 
radical measures had to be taken; and in February, a contract was 
entered into with the Morgan-Belmont syndicate of bankers in 
New York, who agreed to accept the bonds of the Government, stop 
the export and hoarding of gold, and maintain the reserve intact. 
The action of the syndicate was as good as its word and its notable 
achievement did much to reassure business men. 

A distinct revival of the iron trade was experienced in 1895, al- 
though dullness prevailed in most other vocations. The food crops 
of 1895 were record breakers. Stocks made a start on the highway 
to recovery, but public confidence had not fully returned. The 
market was ripe for a reaction; and, at this juncture, December 17, 
1895, President Cleveland sent to Congress his famous message on 
Venezuelan affairs, which seemed to contain a threat of war with 
Great Britain under certain contingencies. In the uncertain state 
of feeling, this message proved a shock to the public mind. A 
genuine, even if short lived, panic broke out in Wall Street, and 
there was a more than fifteen-point slump in stocks. 

In 1896, the banking situation was bad. The net export of gold 
in the fiscal year rose to $78,884,800, a figure exceeded only twice 
before and happily never since. Cash holdings of the banks were 
low. 

In July, 1896, the historic Bryan scare threw Wall Street into a 
fresh panic. Every one sold stocks and in August prices touched 
the lowest level for ten years, going below that of 1893 and 1894. 
The decline from 1892 ranged from $20 to more than $90 in most 
stocks. Union Pacific sold for $4 a share; Northern Pacific for 
$3.50; Reading for $6; Atchison for $8.25, and so on. Sentiment 
was extremely depressed that Summer. The Baltimore & Ohio was 
in the hands of receivers, the iron trade was dull, other industries 
were suffering, and the free silver mania was raging throughout the 
country and seemed about to sweep all before it. 

August was, however, the turning point. Bumper harvests, wheat 
exports, a cessation in the outflow of gold, some imports of the 
metal, and finally the triumphant election of McKinley as Presi- 
dent in November, put an end to depression and revived hope 
throughout the country. Everybody scrambled for stocks, manu- 



136 MONEY MADE IN SECUKITY INVESTMENTS 

facturers began to prepare for a larger business and a bull market 
was quietly set on foot, which, after a little, gained headway and 
ran on for six years. 

CEISIS OF 1903 

The better times did not gain momentum until after July 24, 1897, 
when the Dingley protective tariff received the signature of Presi- 
dent McKinley. Swiftly a boom broke out in stocks. The iron 
and dry goods trades revived; and all classes of mills and shops 
were soon running on full time in order to satisfy buyers, who sent 
in an avalanche of orders. Bank reserves increased enormously. 
Call money loaned at nominal rates of interest in 1897 and did not 
harden greatly for several years. The clouds of gloom fled before 
the bracing winds of prosperity in every part of the United States 
and the betterment gained headway as time wore on. In cities, the 
erection of new buildings attained marvelous proportions ; and the 
increasing use of iron and steel in these structures spurred the iron 
trade. On the lines of transportation, the rails hummed with the 
passing of throngs of heavily laden trains and railroad earnings 
grew steadily larger. Good times blessed the whole country. Every 
business man was doing well. Labor enjoyed ample employment at 
good wages. New ventures of all kinds were launched by the score. 
All the phenomena of profitable times were visible on every side. 
Personal expenditures were lavish in the extreme and men dressed 
their families with a magnificence never before witnessed in this 
republican country. 

During this fortunate period of six or seven years, no influence 
seemed to be lacking to promote the welfare of our people. Com- 
munity of interest, an old principle under a new name, developed 
among the railroads. Eate wars were no more. Gold exports were 
moderate and excited no concern. The grain and cotton crops were 
of handsome size. American breadstuffs and other products found 
a ready and ever growing market abroad; and by 1901, excess of 
exports had reached the astounding total of $664,592,000. 

Meanwhile, a great bull market was in progress at the stock ex- 
changes. With the inevitable reactions, prices mounted steadily; 
and brokers reaped a golden harvest of commissions in the execu- 



PKOSPEKITY, CKISES AND DEPEESSION 137 



tion of orders to buy from every State in the Union. Never before 
had been witnessed such interest on the part of the general public. 
Transactions were in enormous volume, from time to time. Million 
to 2,000,000 share days were common; and on one day in 1901, 
sales at the New York Stock Exchange reached 3,000,000 shares. 
Clerks were forced to work nights and holidays to make out Clear- 
ing House sheets and post the books, in order not to be swamped 
with the stream of business. So tremendous was the physical labor 
of handling such a mass of speculative business, that, on May 11, 
1901, the New York Stock Exchange was closed for one day to 
enable brokers to dispose of the arrears of work. Fortunes were 
made by every trader in the Spring of 1901. It was enough to buy 
"any old thing" on any reaction to be sure of large profits on the 
next rally. Petty traders and big operators divided among them 
the rich profits which were made every week. 

It is not to be supposed for a moment, that the tranquil progress 
of good times and the boom in stocks was not interrupted, now and 
then, by sinister incidents. No such period has been devoid of 
them. Good times were never more sharply tested than during the 
last half of the Cycle under review. 

Frauds in New York in 1897 and the collapse of the E. S. Dean 
Co. in the latter part of that year set back prices for a time and 
called out from Thomas W. Lawson, who was already striving for 
publicity, a two-page article in a New York daily newspaper, headed 
"The Most Gigantic Conspiracy since the Credit Mobilier." 

The trans-Missouri decision, March 22, 1897, chilled enthusiasm 
for several months. 

War with Spain in 1898 was responsible for a sharp reaction. 

May 12, 1899, Eoswell P. Flower died in the midst of a boom in 
certain stocks, with which his house had been identified, and the 
collapse of those specialties administered another setback to the 
market. Mr. Flower's syndicate had boomed Brooklyn Eapid Tran- 
sit to the historic high record of 137 and People's Gas to 129%. 
His death brought about a fall in Brooklyn Eapid Transit of $76 
a share by December and $28% a share in People's Gas. Numerous 
speculators incurred losses from that smash, from which they did 
not recover for years. 



138 MONEY MADE IN SECURITY INVESTMENTS 

In December, 1899, British defeats in South Africa startled the 
English public; and a sudden scare developed, heightened here by 
failure of the New York Produce Exchange Trust Co. and Henry 
Allen & Co. During this panic, call money was quoted at 186 per 
cent. 

In April, 1900, John W. Gates caused the mills of the American 
Steel & Wire Co. to be closed, on account of a falling off in orders 
for their products, and there was another momentary chilling of 
hopeful feeling. 

The corner in Northern Pacific in May, 1901, and the attendant 
panic of the 9th are memorable for the swift and remarkable break 
at the Stock Exchange and the sudden recovery. Speculative favor- 
ites dropped $25 to $80 a share from the high prices made a few 
days previously. In a month's time, the loss had practically been 
recovered. 

A remarkable shortage in the corn crop (2,105,102,000 bushels 
in 1900 and 1,522,520,000 bushels in 1901), several suspensions in 
Wall Street and Canada, the shooting of President McKinley, and 
the collapse of various wild cat securities, all aroused public con- 
cern and contributed to render the market wild and irregular. 

So great was the momentum of the good times, however, that the 
current of prosperity ran on undismayed until the Fall of 1902. 
Wealth accumulated in this era as never before. Hundreds of men 
obscure until the boom in stocks had made them rich took their 
place among old time leaders of finance, with possessions such as 
they had not dreamed of twenty years before. 

At the very height of the good times, forces came into play in the 
old, old way, which foreshadowed a coming crisis. 

Reckless speculation had forced stocks to a dangerous pinnacle of 
prices, much beyond their investment worth, supplying nearly a 
parallel to the year of 1864. A multitude of gigantic corporations 
had been created, most of them a union of smaller ones, with in- 
flated capitalizations, the common stocks of many being given away 
as a bonus. Over $2,000,000,000 of railroad securities alone had 
been issued in addition to the amount afloat. Banks, pools and syn- 
dicates were loaded Avith a mass of "undigested securities" of which 
so much was said in the newspapers of the day. "Indigestible se- 



PROSPERITY, CEISES AND DEPRESSION 139 

curities" they were called by James J. Hill, and that was their char- 
acter. They could not be sold at a profit and all were seeking a 
market in vain. 

Banking capital had been overtaxed by the requirements of legiti- 
mate business; and the pools in Wall Street strained the resources 
of every financial institution almost to the breaking point. In New 
York, five brokerage houses alone were borrowers of more than 
$100,000,000 of money. The pools began to find themselves in a 
dangerous position. 

The top of the bull market came in August and September, 1902. 
Stocks were from $25 to about $170 higher than in 1896 and the 
main body of shares was near to the highest level they had ever 
attained in the history of the country. Desperate efforts were made 
to carry prices farther, but the task was too great. The public took 
alarm and would not buy. When call loans rose to 25 and 35 per 
cent in October, the end had come. The United States Treasury 
was appealed to for relief and something was done in the way of 
anticipating interest and buying bonds. While stocks reacted in 
the latter part of 1902, no serious trouble developed until after the 
January rise in 1903, although liquidation was going on steadily. 

At that time, financial interests of the first magnitude were not 
in entire accord. Harriman was fighting Morgan and Hill. The 
trouble was intensified by President Roosevelt's active hostility to 
the "trusts," his suit to wrest Northern Pacific from E. H. Har- 
riman's control, and his efforts to induce Congress to pass re- 
strictive railroad legislation. Farther, the Anthracite Strike Com- 
mission had made its award, giving the miners a substantial 
victory; and thereupon a wave of labor unrest had swept over the 
whole country, attended with aggressive demands from a great 
variety of labor unions and many exasperating strikes, among them 
one in the building trades in New York, and one among the West- 
ern Miners' Federation. 

The banking situation remained bad all through 1903, loans 
being in excess of deposits every month except the first two. Inter- 
est rates were high. Importing merchants bought enormously 
abroad and imports passed the billion dollar mark for the first time 
in history, the balance of trade in favor of the United States being 



140 MONEY MADE IN SECURITY INVESTMENTS 

reduced to $394,422,000. Gold exports were avoided only by the 
concerted action of leading banks. 

James J. Hill startled the public at this juncture by declaring in 
a speech that the "crest of the wave of prosperity" had passed. A 
conviction that this was true gradually forced itself into an in- 
credulous public mind. Railroads were seen to be economizing in 
their purchase of rails and equipment. Reaction set in, in the iron 
and other trades. February 19, 1903, the Elkins act became a law, 
instituting severe penalties for rebates by railroads. In April, 1903, 
a unanimous decision was rendered by the United States Circuit 
Court of Appeals that the Northern Securities merger was illegal. 
This decision, which had been feared for several months by finan- 
ciers, unsettled confidence by threatening that the harmony in the 
railroad world would be broken. Banks, pools and syndicates be- 
gan immediately to unload some of the securities they were carrying 
and loans were freely called. Liquidation was stimulated by a 
formidable bear party, which included some of the most daring and 
keenest minds in Wall Street. By June, the "rich man's panic" 
was in full swing. Stocks fell with hardly a halt until September, 
1903, when with a final smash amid great excitement, the reaction 
terminated, having run its course in one year's time. The decline 
ranged from $20 to $75 or more a share. Fortunes shrank heavily 
during the twelve months and many business men and speculators 
went to the wall. 

In business circles, the reaction lasted until the Summer of 1904. 
Enforced closing of many mills and shops was reported. Retrench- 
ment was the order of the day. Thousands of workmen were dis- 
charged from railroads and industries and nearly as many clerks 
from offices. 

A new era of prosperity was ushered in during 1904. Liquida- 
tion of speculative accounts and the inaction in trade had produced 
a striking result in the banking situation in New York. Surplus 
deposits rose from $40,000,000 below zero in November, 1903, to a 
surplus of $111,000,000 in August, 1904, and interest rates were 
forced down by the plethora of funds to 1 and 2 per cent for call 
loans and 2% to 3% for time money. The great abundance of 
available cash led, as always, to a bull market. 



PROSPERITY, CRISES AND DEPRESSION 141 

PANIC OF 1907 

Top of the boom was touched January 24, 1906. Stocks then de- 
clined. An incident of this period, which may be mentioned in 
passing, was enactment of the so-called Hepburn law by Congress 
June 29, 1906, which contained the "commodities clause" forbid- 
ding railroads to transport coal, mined by themselves at their own 
mines. While not contributing to the causes, which precipitated 
the Panic of 1907, operation of the law afterwards forced the rail- 
roads of the country to organize coal companies to carry on the 
actual process of mining, the coal being transported for them as for 
other patrons of the lines. 

Business was in a high state of prosperity in all parts of the coun- 
try in 1906. Crops had been enormous, breaking all records. Every 
one was making money. The railroads were crowded with traffic 
and the number and length of freight trains was a marvel. Almost 
all the trunk lines and some others voted larger dividends, Union 
Pacific going on a 10 per cent basis. Wage advances were granted 
by the railroads aggregating about $100,000,000 and an advance 
equal in amount was conceded by the industries. Over $2,000,000,- 
000 of charters of the million-dollar class were taken out, and over 
$1,000,000,000 of new securities were authorized. The general 
public had lost all sense of perspective and had been carried away 
from the moorings of common sense and experience. Men there 
were who actually predicted that the good times had come to stay 
forever and that there would not be another panic and period of 
depression for a century to come. The old, old story of the condi- 
tions forerunning a crisis was repeated in all other particulars. 
Bank reserves in New York fell to a low ebb. Interest rates rose, 
and the enormous excess of loans over deposits alone foreshadowed 
the turn in the tide. In spite of rallies, stocks ended the year lower 
than at the start. In 1907, after a feeble January rally, and espe- 
cially after Congress had adjourned without relieving the financial 
stringency, liquidation set in. In March, a panic broke out in New 
York; and stocks and bonds fell at times furiously, never stopping 
until November 21st. The slaughter of prices was terrific. The 
advance of the previous six years was wiped out; and the panic 



142 MONEY MADE IN SECUKITY INVESTMENTS 

brought to light the usual exposures of rottenness in various finan- 
cial quarters. The fall in the prices of bonds was not the least 
striking feature of the panic of 1907. 

In October and November, more than 40 banks and trust com- 
panies in New York and elsewhere closed their doors. Fifty-one 
Clearing Houses in American cities issued Clearing House certifi- 
cates, New York alone issuing $101,185,000. (Later, in 1914, only 
12 Clearing Houses resorted to this panic expedient.) Call money 
rose to 125 per cent in New York. So completely were the general 
public frightened by the bank failures and the scarcity of currency, 
that not only did thousands of men refrain from using their bank 
balances at that time for the purchase of sound securities at the 
remarkably low prices then prevailing, but they collected all the 
ready cash which they could extort from reluctant financial institu- 
tions and stowed it away in safe deposit boxes, in order to make sure 
of money enough to pay current expenses for a year ahead. The 
enormous private hoarding of cash contributed to the troubles of 
that historic year. In several Western States, legal holidays were 
proclaimed for many days in succession, to save the banks, while the 
Stock Exchanges in Pittsburgh and New Orleans were closed for 
more than a month. England raised its bank rate to 7 per cent, the 
highest since 1873. 

From the high prices of 1906, the average decline in active stocks 
was $81 a share. Union Pacific fell 95% ; Eeading, 93 1 /2 \ Delaware 
& Hudson, 111%; St. Paul, 106%; Chicago & Northwestern, 114; 
Northern Pacific, 132; American Smelting, 115%; Great Northern, 
preferred, ex- Ore certificates, 240% ; and Westinghouse Electric & 
Manufacturing, 144. 

The panic of 1907 was due to monetary and financial considera- 
tions and should not have been a surprise to the business world. 
Its approach was unmistakable in December, 1906. The panic was, 
in fact, predicted by Jacob H. Schiff, Frank A. Vanderlip and 
others, and by the author of this book in correspondence with the 
authorities at Washington. 

The troubles of 1907 were intensified by a wave of political hos- 
tility to corporations, which had swept the country from end to 
end. Not only had the national administration begun war upon 



PROSPERITY, CRISES AND DEPRESSION 143 



Standard Oil and initiated a general campaign of prosecution of 
the "trusts," inspired by enmity toward "certain malefactors of 
great wealth," but President Roosevelt's example had led the States 
to enter upon the enactment of 2-cents-a-mile laws and other op- 
pressive restrictions upon the railroads. The air was full of 
antagonism toward the interests, which had just given the whole 
country ten years of unexampled prosperity. States and the nation 
vied with each other in passing laws, ostensibly for control of cor- 
porations but nearly all having the effect of reducing their net 
incomes. An extra expense of $200,000,000 a year was saddled 
upon the railroads by these laws. President Roosevelt's denuncia- 
tions of rich men, and of Federal Courts which had not decided 
Government suits as he wished them to, also proved disturbing. 
Farther, an active campaign was begun against "trusts" with a view 
to force their dismemberment into their original component parts. 
November 15, 1906, the Government filed a suit under the Sherman 
law for dissolution of the Standard Oil Company, as a monopoly in 
restraint of trade, a proceeding which dragged along in the courts 
for nearly five years before it was decided. July 11, 1907, a similar 
dissolution suit was brought against American Tobacco. Other 
prosecutions were ordered. August 3, 1907, Judge Landis of Chi- 
cago imposed upon Standard Oil of Indiana the unheard-of fine of 
$29,240,000 for accepting rebates. While this fine was overruled 
later, and none at all was collected, the shock to public confidence 
was great, and the worst of the panic of 1907 occurred thereafter. 

A serious crop shortage accentuated the troubles of the latter 
part of 1907. The five principal grain crops aggregated only 4,166,- 
013,000 bushels in 1907 against 4,839,871,000 bushels in 1906, 
while cotton fell from 13,305,265 bales in 1906 to 11,325,882 bales 
in 1907. 

General trade in the United States did not feel the panic, until 
the financial storm was over. In October, 1907, earnings of rail- 
roads and industries were the largest in history. Thereafter, reces- 
sion in trade and traffic was rapid. By January, 1908, railroad 
earnings had declined almost one half, and trade had diminished 
materially. Mills and factories were closed in large numbers. 
Wages were reduced in many trades. And, in the first half of 1908, 



144 MONEY MADE IN SECUBITY INVESTMENTS 

there were reductions or suspensions of dividends by many railroads 
and industrial corporations, while a number of small railroads went 
into bankruptcy. 

Recession in trade came to an end in the Spring of 1908. So 
rapid was the recuperation which followed, that it proved the mar- 
vel of the whole world. The protective duties of the Dingley tariff 
law, then in operation, provided a powerful stimulus to manu- 
facturing. Scant attention was paid to a decision by the United 
States Circuit Court, November 7, 1908, ordering the dissolution of 
American Tobacco. The election of President Taft in November, 
1908, and his declaration that "every man who is obeying the law 
may go ahead with all the energy in his possession," greatly aided 
the return of better times. May 3, 1909, the United States Supreme 
Court rendered a decision, which gave great satisfaction to financial 
interests. Under the "commodities clause" of the Hepburn law, 
the Attorney General of the United States had brought a suit in 
1908 against all the anthracite roads of the Middle States to compel 
them to dispose of their coal mines. The roads won this suit in the 
lower courts, September 10, 1908, but the Government appealed. 
The United States Supreme Court upheld the law; but declared 
that the sole object of the law was to forbid carriers to own the coal, 
transported by them, and the court simply required that the mines 
be transferred to the ownership of specially organized companies 
which should thereafter own and sell the coal. The court's verdict 
enabled the railroads interested to sell the mines to their own stock- 
holders, which is practically what it amounted to. Effect upon the 
shares of the anthracite coal roads was most happy. The revival of 
trade ran along until the latter part of 1909, by which time railroad 
and industrial earnings had again broken all previous records and 
the whole country was in a state of great prosperity. Up to August 
12, 1909, leading stocks had recovered an average of $67 a share. 
Union Pacific had risen 119; Southern Pacific, 76; Eeading, 103; 
U. S. Steel, 73. 

Financial powers of the first magnitude had prepared to carry 
the stock market considerably higher. An end was put to the bull 
campaign, however, by the fatal illness of E. II. Harriman, in 
August, 1909, and by his death September 9th. Many plans of im- 



PROSPERITY, CEISES AND DEPRESSION" 145 

portance were then slowly and reluctantly, but compulsorily, aban- 
doned, because Mr. Harriman's cooperation had been necessary. 
Liquidation took the place of speculation for a farther rise. No- 
vember 20, 1909, the U. S. Court at St. Louis ordered the dissolu- 
tion of Standard Oil; and after the 1st of January, 1910, the stock 
market turned downward. 

REACTION OF 1910 

The troubles of the year of 1910 were again due to causes political 
and financial. Duties on many classes of foreign goods were re- 
duced by the Payne tariff law of August 5, 1909, promoting im- 
ports, while the high price of cotton and grain reduced exports. 
The balance of foreign trade in our favor, $666,431,554 in the fiscal 
year of 1908, was reduced to $187,164,732 in the fiscal year of 1910. 
In the latter year, more than $75,000,000 of gold was exported, to 
the detriment of our banking resources. Cost of living was un- 
usually high, and there was a popular craze for buying automobiles. 
Millions of money were withheld from investment in securities, and 
other securities were sold to obtain ready cash. 

But the Federal campaign against "trusts" was chief among the 
influences which alarmed legitimate business interests in 1910 and 
led to a long, slow, persistent decline in stocks and a material reces- 
sion in trade. Numerous prosecutions were brought by the Attorney 
General. A new railroad law was enacted June 18, 1910, increasing 
the powers of the Commerce Commission and placing freight rates 
entirely under its control. A corporation tax law was enacted. 
When the railroads proposed, in May, 1910, to increase freight 
rates, to offset higher wages recently granted, the Attorney General 
promptly brought an injunction suit at midnight of May 31st and 
stopped the proceeding. Delay took place in a final decision of the 
American Tobacco and Standard Oil dissolution cases, which had 
been appealed to the U. S. Supreme Court, and the disposition of 
which was impatiently awaited by the financial world, in order that 
it might be known what corporations are legal under the Sherman 
anti-trust law. Political clamor also arose in favor of farther dras- 
tic revision of the tariff. Not to mention other incidents of 1910, 
in harmony with those mentioned, suffice it to say that political 



146 MONEY MADE IN SECUEITY INVESTMENTS 

hostility toward corporations and toward the protective tariff com- 
pletely upset the business world., and brought on a series of declines 
in stocks, as well as a reaction in trade. 

Lowest prices for stocks were registered in July, 1910, when ac- 
tive denominations had fallen an average of $40 a share. 

1910 TO 1915 

The period from July, 1910, to the end of 1915 was attended, first, 
by a strong recovery in the stock market, lasting until July, 1911 ; 
a speculative fright and reaction in stocks in the Fall of 1911; a 
long slow bull market, which ran on until October, 1912; a slow, 
irregular decline in stocks, which culminated in a panic in July, 
1914; and a wonderful recovery in both business and stocks (inter- 
spersed with reactions in the latter), which had not yet culminated 
in January, 1916, so far as standard investment shares and even 
some of the war issues were concerned. 

The dominating influence of 1910 and 1911 was the exasperating 
persecution of corporations by the national administration under 
the Sherman law and other anti-trust statutes, and the persistent 
hostility of the Commerce Commission toward railroads. 

November 29, 1910, the Government filed a suit for dissolution 
of the American Sugar Kenning Company and instituted criminal 
proceedings against various directors. The criminal suits have since 
been beaten, but in 1916 the dissolution suit is yet pending. 

The railroads of the country, oppressed by the constant petty 
reductions of rates by the Commerce Commission, had made a pow- 
erful appeal to that Commission in 1910 for permission to initiate 
a general advance in freight rates. The petition had been under 
argument for nearly a year. February 23, 1911, the Commission 
refused the advance in rates, to the great discouragement of the 
whole financial world. 

May 15, 1911, the fierce Government prosecution of Standard 
Oil, as a monopoly in restraint of trade, was brought to an end by 
a decree of the Supreme Court of the United States, ordering dis- 
solution of the company. It was in that decision that the Court 
laid down "the rule of reason," to govern trust cases in the future. 
May 29, 1911, the same tribunal ordered the dissolution of Ameri- 



PKOSPEKITY, CEISES AND DEPKESSION 147 

can Tobacco. The financial world had, however, accepted the dis- 
solutions as probable and the verdicts had no adverse effects on 
stocks or business, whereas the fact that "the rule of reason" was to 
be applied in the future was accepted with satisfaction. 

But in the Fall of 1911, it became known that the Government 
was preparing to bring a dissolution suit against the great United 
States Steel Corporation, a concern which had proved the greatest 
boon to the iron and steel trade in the history of the country 
through its refusal to advance prices excessively in periods of busi- 
ness prosperity and its refusal to join with independent steel makers 
on various occasions in a conspiracy to extort high prices. The 
shares of the U. S. Steel Corporation had become extremely popular 
and were widely held as investments by the people of the United 
States. Alarm over a probable dissolution suit led to heavy selling 
of Steel shares in August and September, 1911. The whole market 
succumbed sympathetically and there was a reaction into October, 
averaging $26 a share in six leading and significant stocks. The dis- 
solution suit was actually filed in the courts, October 26, 1911. The 
worst being then known, bear speculators covered their short com- 
mitments, and a bull market started, lasting until well into 1912. 

During 1912, business revived in the United States appreciably, 
assisted by record breaking crops of grain. Production of the five 
leading grains amounted to 5,532,838,000 bushels, compared with 
4,268,483,000 bushels the year before. There was sufficient founda- 
tion in 1912, therefore, for the bull market of that year. 

Outbreak of war in the Balkans, October 8, 1912, brought the 
bull movement to a premature close. Several countries in Europe 
feared, and two or three hoped, that Balkan troubles would lead to 
a general war. Immediately banks, investment companies, and in- 
dividuals in Europe began to prepare for possibilities by liquidating 
their security investments, especially American bonds and stocks, 
whereupon a long slow decline in our markets set in, which culmi- 
nated finally in 1914, upon the declaration of war by Austria on 
Serbia, July 28th, an incident which precipitated the long-dreaded 
and long-expected general war in Europe. The financial smash in 
the United States was most severe. The South was prostrated by 
sudden curtailment of exports of cotton. 



148 MONEY MADE IN SECURITY INVESTMENTS 

Meanwhile, other incidents had occurred, upsetting to business 
and stocks. In the November elections of 1912, owing to a split in 
the protective tariff party in the United States, Woodrow Wilson, 
a Southern man and an advocate of low duties, was elected Presi- 
dent of the United States. With him was elected a Congress in 
sympathy with his political principles; and the Underwood tariff, 
reducing duties and reintroducing ad valorem duties in place of 
specific, became the law of the land, October 3, 1913. This law 
proved immediately depressing to general business throughout the 
United States. Two other notable dissolution suits were brought in 
1913, one on March 2d against Corn Products Refining, and one on 
November 29th against the American Can Company, while various 
other trust prosecutions were brought against railroads. 

In the midst of the war panic of 1914, the New York Stock Ex- 
change closed its doors after July 30th, for the second time on 
record, the previous occasion being an incident of the panic of 1873. 
The Exchange did not reopen for business for several months. 
Practically all the other stock exchanges of the United States imi- 
tated New York's example promptly. The cotton exchanges were 
also closed. Two months later, beginning in September, the local 
exchanges throughout the country began to resume one after an- 
other. November 12th, the Curb market in New York resumed trad- 
ing in unlisted securities. The cotton exchanges in New York and 
New Orleans reopened November 16th. The New York Stock 
Exchange opened its doors for open trading in bonds only, Novem- 
ber 28th. December 10th, the Boston Stock Exchange resumed. 
On December 12, 1914, after a suspension of 111 business days, the 
New York Stock Exchange resumed open trading in stocks. 

During the long period of suspension of the Stock Exchange, the 
authorities in New York and other cities established minimum 
prices for all leading stocks and bonds, and permitted the private 
liquidation of speculative accounts at not less than the minimum 
prices established. The object was to relieve the pressure upon 
bank loans. Customers of the commission houses were influenced, 
as far as possible, either to pay in full for stocks which were being 
carried on margins, or to take their losses through the sale of their 
securities. All trades and sales by brokers in behalf of their custom- 






PEOSPEEITY, CEISES AND DEPEESSION 149 

ers were required to be submitted to the stock exchanges for ap- 
proval; and these trades were accomplished privately through the 
medium of the stock exchange clearing houses. By December, 
liquidation had been practically accomplished and the exchanges 
were ready to resume business openly. 

A curious episode of this remarkable period was the sudden 
creation of an open market for stocks and bonds, in New York, by 
the "put and call" brokers, who gathered in the open air in the 
roadway and sidewalks of New Street, and there bought and sold 
securities for cash. In this novel and transitory market, which dis- 
appeared the moment the regular exchanges opened their doors, 
stocks were bought and sold at first at prices lower than the mini- 
mum fixed by the stock exchanges, but later they rallied above the 
minimum prices, and when the stock exchanges reopened there 
was considerable stability in the market. 

The financial difficulties of 1914 in the United States were inten- 
sified by the disturbance of our foreign trade, April to August, and 
by the enormous European liquidation of American securities. For 
three years previously, the monthly balance of trade had run heavily 
in favor of the United States, month by month and year by year, 
amounting to $560,000,000 in the year of 1911; $581,000,000 in 
1912 ; and $691,400,000 in 1913. But in the four months of April- 
July, 1914, the balance of trade ran against the United States to 
the amount of $29,000,000. This fact, coupled with shipment of 
vast quantities of stocks and bonds to the United States for sale, 
led to an almost unprecedented volume of gold exports, amounting 
to $165,200,000 net in 1914, and left us owing Europe $150,000,- 
000 on current account. As a result, the banks of New York city, 
which bore the brunt of the shock, were so grievously burdened that 
they were obliged to suspend the issue of the regular weekly bank 
statements, from August 1st until November 21st. Meager totals 
were given out and that was all. The New York Clearing House 
for the tenth time on record was obliged to issue clearing house 
certificates to the amount of $124,695,000. In twelve other cities, 
clearing house certificates were also resorted to in an aggregate 
amount of $87,083,000. 

The wonderful stock market boom of 1915 has never been sur- 



150 MONEY MADE IN SECURITY INVESTMENTS 

passed in the United States for the high prices attained by certain 
shares. The only parallels on record are furnished by the years 1864, 
1902, 1906 and 1909. The boom was based on a substantial revival 
of business, originating, as such revivals always do, with the iron 
and steel industry, and with the concession of higher freight rates 
to the railroads by the Commerce Commission, beginning in 1914. 
The war in Europe brought to this country from England, France, 
Eussia and Italy orders for nearly two billion dollars' worth of 
grain, meat, clothing, barbed wire, firearms, powder, shells, motor 
cars and other munitions of war. Within a few months' time, all 
industrial corporations which were fitted to manufacture the specific 
articles required by the armies abroad, were overwhelmed with a 
volume of business, which ensured them work at full capacity and 
unusual profits for one and two years ahead. Copper metal, a prime 
material for the manufacture of fixed ammunition, and alcohol and 
sulphuric acid, used in the manufacture of explosives, all came into 
strong demand. Gasoline and benzol were also in demand and were 
extensively bought in this country. The concerns engaged in pro- 
duction of these different articles were assured of immense profits, 
ranging from 30 to 100 per cent on their common shares, for a year 
or two ahead, and these shares rose enormously in market value. 
Here are some of the striking instances : 

Low price of 1915 High price of 1915 

American Can 25 68% 

American Coal Products .... 82 170% 

Baldwin Locomotive 26% 154% 

Bethlehem Steel 46% 600 

Canadian Car & Foundry .... 76 119 

Carbon Steel 41 134 

Crucible Steel 18% 109% 

Continental Can 40% 127 

Driggs-Seabury (ordnance) . . . 66% 190 

Electric Boat (submarines) ... 18*4 109% 

General Motors 82 558 

Lackawanna Steel 28 94% 

Maxwell Motor 15% 92 

Midvale Steel 60 97% 

Standard Oil of New Jersey ... 385 570 

Studebaker (motor cars and wagons) 35% 195 

U. S. Industrial Alcohol .... 15 131% 

United States Steel 38 89% 

Westinghouse Electric 32 74% 

Willys-Overland (motor cars) . . 87 268 

Some of the foregoing high prices have since been exceeded. 



PROSPERITY, CRISES AND DEPRESSION 151 

Railroad shares enjoyed a considerable rise but they were sub- 
jected to the retarding effect of continual sales by European invest- 
ors. No boom in these issues was looked for, or could have been 
managed, until the end of the war in Europe should have reduced 
the volume of foreign sales and perhaps initiated new European 
buying. 

A peremptory call for wheat and flour to feed the warring ar- 
mies abroad came at a time when the farmers of the United States 
were marketing the greatest crop then ever raised, that of 1914, 
amounting to 891,107,000 bushels. A large production should, by 
economic law, bring low prices. But enormous exports of wheat in 
1915 caused May wheat to rise to $1.67 a bushel and July wheat 
to $1.43%. The size of the crop and the unusual prices at which 
it was sold lent great support to a revival of business in the United 
States and the bull market in stocks in 1915. An even greater crop 
was harvested in 1915 and is finding a ready sale abroad at higher 
prices than for many years previously. 

Foreign trade supplied another substantial backing for the pros- 
perity of 1915. Excess of exports over imports exceeded $1,700,- 
000,000, a record never before made, and this in spite of heavily 
reduced exports of cotton, heretofore the largest individual money- 
maker in our foreign trade. 

The country enters 1916 yet burdened with a revenue tariff, 
whose ill effects have been largely postponed until after the end of 
the war in Europe, but with public sentiment more favorable to big 
business and the railroads, and with every prospect of a year or two 
more of good times. 



It is to be noted, as a distinct and logical phenomenon, that a de- 
cline in stocks antedates an actual turn downward in business, and 
sometimes brings about the crisis. The top of a boom in stocks 
occurs at least one or two, sometimes three, years before the actual 
crisis. 

On the other hand, recovery in stocks sets in before improvement 
is at all marked in trade circles. 

Just as stocks are extremely apt to be bulled far above investment 



152 MONEY MADE IN SECUEITY INVESTMENTS 

worth in a great rising market, so they tend to go much below it in a 
prolonged reaction. 

A circumstance of momentous interest is the fact, that the price 
of good securities steadily moved higher, on the average, after 1877, 
in spite of all the trials to which they had been subjected by panics 
and reactions, until 1909. It is true that they declined in every 
serious crisis; but, without a single exception in the thirty-two 
years, the average of prices did not fall as low as in the last preced- 
ing period of depression, whereas they tended in each new period 
of prosperity to go higher than ever before. From 1909 until 1915, 
the broad trend of the stock and bond markets has been downward 
in consequence of public hostility toward corporations and a reversal 
of the protective tariff policy of the United States. 



X 

COUKSE OF THE STOCK MARKET SINCE 1860 

BULL AND BEAK MARKETS, PERIODS OF PROSPERITY AND DEPRESSION, SHOWN 
GRAPHICALLY.— A DIAGRAM OF THE FLUCTUATIONS IN TWENTY SELECTED 
RAILROAD STOCKS 

It is desirable that the students of economics and finance shall 
know the manner in which corporate shares have responded to 
the varying influences of the times for a period of years. This is 
shown by a diagram, representing the course of the average of 
actual prices of 20 railroad stocks since 1860, on the following page. 
In 1860, there were only 17 railroad shares whose quotations are 
available for this chart. They were : 

Central of New Jersey, Erie, 

Chic, Burlington & Quincy, Hudson River, 

Chicago & Eock Island, Harlem, 

Cleveland & Pittsburgh, Illinois Central, 

Cleveland & Toledo, Michigan Central, 

Cleveland, Columbus & Cincinnati, Michigan Southern, 

Delaware & Hudson, Milwaukee & Prairie du Chien, 

Delaware & Lackawanna, N. Y. Central, 

Reading. 

In 1863, there were added to the list three more, namely, Chicago 
& Alton; Chicago & Northwestern; and Pittsburgh, Fort Wayne & 
Chicago, making 20 in all. 

In the tabulation of statistics for the sake of this chart, it became 
necessary to make changes in the list of 20 stocks from time to 
time. When 1ST. Y. Central was combined with Hudson Eiver in 
1870, it became necessary to drop Hudson Eiver and select in lieu 
thereof another railroad stock as nearly as possible of the same class 
and market value. When Chicago & Alton was dropped from the 
list of the New York Stock Exchange, temporarily, in 1899, another 
substitution was necessary. 

153 



154 MONEY MADE IN SECUKITY INVESTMENTS 




COUESE OF THE STOCK MARKET SINCE 1860 155 




156 MONEY MADE IN SECUKITY INVESTMENTS 

Delaware, Lackawanna & Western became too high priced an 
issue in 1899 to serve a useful purpose and was exchanged for 
Lehigh Valley. Northern Pacific has been omitted entirely because 
it disappeared from the exchanges in 1901 for several years. 

Other changes were made, one at a time. From 1900 to date, 
the chart shows the major swings of the following 20 railroad 
shares : 

Atchison, Topeka & Santa Fe, Louisville & Nashville, 

Baltimore & Ohio, Missouri, Kansas & Texas, preferred 

Chesapeake & Ohio, New York Central, 

Chicago, Milwaukee & St. Paul, New York, New Haven & Hartford, 

Chicago & Northwestern, Norfolk & Western, 

Delaware & Hudson, Pennsylvania, 

Erie, 1st preferred, Reading, 

Great Northern, preferred, Southern Railway, preferred, 

Illinois Central, Southern Pacific, 

Lehigh Valley, Union Pacific. 

The foregoing 20 denominations are thoroughly representative of 
the whole body of railroad shares, because, with rare and infre- 
quent exceptions, the whole stock market has always moved simul- 
taneously in one direction, either up or down. 



XI 

INVESTMENT AND SPECULATION 

A DEFINITION OF EACH. — THEIR POSSIBILITIES 

accurate thinking is promoted by scientific definitions. The old 
-tX idea of Investment was the application of savings or surplus 
profits to the purchase of property, business or securities, yielding a 
fixed rate of income; the income being larger than a savings bank 
affords, or on a larger sum of money than the savings banks will 
accept on deposit ; payment of the income being certain. Attention 
of the investor was always drawn to Income, the Eate, and Cer- 
tainty of the Income. In the mind of the investor in securities, 
there was always this farther idea, that the bonds or stocks which 
he bought were to constitute the nucleus of his fortune or a per- 
manent addition to his accumulated wealth. 

Investors have discovered to their chagrin that Income and the 
Certainty of it can never be guaranteed except by real estate mort- 
gages. The safest form of security investment is in a mortgage, on 
well located real estate, the mortgage being executed for not more 
than two-thirds of the value of the property. There is less specu- 
lative risk in mortgages than in most other forms of securities. On 
the other hand, there is no increment to capital. The income is 
fixed and definite. A man knows exactly what he is going to re- 
ceive in the way of income. Both principal and interest are secure. 
When the mortgage is paid, the investor receives his entire princi- 
pal, no more, no less. A man does not add to or lose his capital in 
a real estate mortgage, but his money is safe. With the generality 
of stocks and bonds, the case is different. 

INVESTMENT 

In" view of the whole financial history of the United States, it 
seems clear that the working definition of Investment, the real 

157 



158 MONEY MADE IN SECUEITY INVESTMENTS 

definition, so far as bonds or shares of stock are concerned, should 
be securities which provide : 

1. Absolute safety of the principal invested, so that the security, when 
sold, shall yield at least the amount of the original capital. This ought now 
to be the first consideration in making an Investment, and is here given first 
place, accordingly. 

2. An income, which for various reasons should be at least equal to the 
average rate of interest on 6 months bank loans, during a period of years, 
including at least one year of good times. This provision helps safeguard 
the principal. 

3. Certainty of income, even in dull years. 

4. Keady convertibility into cash, when the security is sold. 

Unless those four fundamental objects are positively secured, 
then the securities purchased are not an Investment. They are es- 
sentially a Speculation, whether so intended or not, and no matter 
whether the purchaser intends to hold them for a long term of 
years, or for only a comparatively short period. 

It follows, therefore, that no. exchange of cash for securities is an 
Investment, a real Investment, a wise Investment, the only kind 
that a man ought to make, unless it takes place under such circum- 
stances, and at such a price, that a subsequent advance in market 
value of the securities is practically assured. The propriety of 
making an Investment should always be considered from this point 
of view. 

Now, of course, by a subsequent advance in value, an Investor is 
always able to add an increment to his original capital. This cir- 
cumstance may seem to constitute every Investment a Speculation. 
But, in fact, it does not, except as one might say by accident. So 
far as that is concerned, an Investor is always entitled to a profit on 
his capital, as much so as a merchant, who expects his capital to be 
returned to him, after sale of his goods, with a profit added. But 
that is not the point here. When capital is put into securities, 
then, to be a good investment, the securities must at any rate always 
enable a man to reclaim his capital. 

SPECULATION 

Speculation" in securities is (1) the purchase of bonds or shares 
of stock which the owner expects to hold for a comparatively short 
period, and which he expects to sell at an advance in price, or, (2) 
the sale of securities, with the express intention of repurchasing at 



INVESTMENT AND SPECULATION 159 

a lower price. In Speculation, a man operates in part, as a rule, 
with borrowed capital, sometimes almost wholly so. 

Investors become speculators, technically, to a certain extent, 
when they sell out their securities at the dizzy pinnacle of an ex- 
traordinary boom, like that engineered by Harriman and his 
Standard Oil and other associates in 1906, and at any other time 
when all the weather vanes of finance point rigidly to a coming 
business and financial panic. The Investor foresees the inevitable 
crash; and he sells in order to recover all his income producing 
securities at much lower prices, within the next year or so, and, as 
a matter of fact, he does so. Investors are extremely sensitive to 
any imputation that they are speculators; and their clearness of 
vision and the coolness and certainty, with which they proceed, 
relieve them from any suspicion of being speculators in the popular 
sense of the word. Nevertheless, the transaction referred to comes 
within the technical definition of a Speculation. Securities are 
sold for the sake of repurchase at a lower price. This is the essen- 
tial nature of Speculation, an operation to take advantage of a 
coming change in prices. 

Income from the securities traded in enters into the success of 
Speculation to some extent, because those who figure closely all 
possible sources of profit do not disregard it. But the majority of 
speculators pay little attention to income. The main object of a 
Speculation is, and its principal remuneration accrues from, a 
change in price. This is the whole meaning of the word. 

The very nature of these definitions shows the reasonableness of 
the assertion, that Investment and Speculation are not far apart in 
their nature. They go hand in hand. Nevertheless, they are two 
perfectly separate and distinct things. They are similar, in that 
both are attended with more or less risk, and both are capable of 
adding to wealth. The risk is minimized, however, in the case of a 
proper Investment. In Speculation, the profits are greater. Where 
successful, as it may always be, Speculation is far more attractive in 
its results than Investment. Investment aims mainly at safety of 
capital and an income, together with what might be called a trades- 
man's profit on the goods when sold. Speculation sets its heart upon 
bonanza profits and if properly conducted makes them. 



160 MONEY MADE IN SECURITY INVESTMENTS 

Now, with reference to Speculation, there are two radically differ- 
ent branches of the practice. 

One of them is as well grounded, laudable and sound as Invest- 
ment ; ennobling to the mind ; not detrimental to character or repu- 
tation ; containing an almost negligible element of risk ; practically 
certain to bring a rich reward in the accumulation of a competence ; 
and indeed a most useful adjunct and guide in the management of 
a man's practical business affairs, because it is based upon an intelli- 
gent judgment of the trend of the times, that is to say on foresight. 
This is the purchase of securities, as certain critical opportunities 
present themselves, to be hereinafter more particularly described, in 
the expectation of substantial profits at a certain not distant period 
of time ahead; or, on the other hand, the sale of securities, at cer- 
tain other critical periods, with a view to repurchase at a much 
lower range of prices. The man who engages in an operation of this 
so-called "long pull" character cannot be regarded as a speculator 
in any meretricious or disreputable sense, and his transaction 
should be regarded as a sound, sagacious and creditable business 
proceeding. Such an operation has great value to the man himself. 

The author has a correspondent, who for five years never looked 
at a newspaper. He was too much occupied with the details of an 
engrossing business occupation. At times, his business was active 
and profitable ; at others, depressed to the point where it barely met 
expenses. He never knew why it was so, in either case. Under in- 
structions, he bought stocks early in 1908, before the big rise began. 
This wrought a great change in the man himself. He became at 
once interested in the world's doings; in legislation affecting rail- 
roads and corporations; in the tariff; in the crops and in all that 
affected earnings; matters to which he had never before paid the 
slightest attention. For the first time in his life, the daily news- 
paper became entertaining and instructive to him beyond expres- 
sion. He himself became vigilant and attentive to the constant 
changes going on around him ; and by reason of his broader know- 
ledge and his new acquaintance with the forces which lead to pros- 
perity or depression, he became much more competent in the 
management of his private business and in adapting it to the trend 
of the times. Speculation which produces results as beneficial as 



INVESTMENT AND SPECULATION 161 

these, must be regarded as highly laudable, entirely without regard 
to the manner in which it promotes wealth. 

The other branch of Speculation is less meritorious, because it 
partakes entirely of the nature of gambling. This is Speculation 
for petty turns in the prices of stocks, and on a narrow margin, 
operations being based on rumors and "tips" or on tape reading. 
In this line of effort, a very few persons of peculiar abilities excel ; 
and they accumulate fortunes. But where one succeeds, hundreds 
fail. With the generality of petty speculators, their losses generally 
amount to as much as their profits; so that even at the best, they 
find Speculation unsatisfactory in its results. They never get 
ahead. It is this form of the practice which gives Speculation a 
bad name and rightfully injures the reputation and business stand- 
ing of those who engage in it. 

POSSIBILITIES 

At 6 per cent compound interest, money doubles itself in about 12 
years. In some parts of the United States, money can be loaned, 
year after year, at 6 per cent. Compound interest is the source of 
many fortunes in France and continental Europe, and of a few in 
this country. 

Through application of surplus capital to purchase of sound se- 
curities, sales of the same at critical periods, and repurchase at 
others, money should increase through the medium of Investment 
at least 100-fold in 5 or 6 years. Opportunities for sale and repur- 
chase occur, normally, once or twice every year. The large gains, 
possible in Investment, are not theoretical. They have been exem- 
plified in the lives of thousands of prosperous men. 

In legitimate Speculation, based on the considerations to be here- 
inafter set forth, money should increase from 50 to 100 per cent 
every year, and this too by trading in moderation on a margin of 
$40 to $50 a share. After the first ten or twelve years the rate of 
advance will be slower, but large, nevertheless. When a man's for- 
tune is so large that, like Frank A. Munsey or Henry C. Frick, or 
the late E. H. Harriman, he can handle from 100,000 to 300,000 
shares of stock, so large a block can neither be bought nor sold as 
advantageously, or as promptly, as a block of 1,000 shares. After 



162 MONEY MADE IN SECUKITY INVESTMENTS 

the attainment of a considerable fortune, therefore, the rate of 
accumulation is not as rapid as previously. 

Legitimate Speculation is so dazzling in its possibilities, that the 
foregoing statement of it may seem incredible. It is a perfectly 
truthful assertion, however, and explains why so many men, who 
began life without a dollar, have left from $80,000,000 to $150,- 
000,000 to their heirs. 



XII 
TURNING POINTS IN THE MARKET 

HOW THE MARKET ACTS AT TOP AND BOTTOM OF LONG SWINGS. — THE ART OF 
MANIPULATION.— PHENOMENA OF BULL AND BEAR MARKETS. — CHARTS 

Whoever would make money in securities must buy them when 
they are cheap, all things considered, or when the stock mar- 
ket is about to turn for one of its major 20 to 25 point advances, 
and must sell the securities when they are too high, all things con- 
sidered, or when the stock market is about to turn for a substantial 
decline. A matter of first class importance therefore is a Turning 
Point in the Market. 

Suggestions have been made in a previous chapter, which should 
aid an intelligent man to form a judgment as to underlying condi- 
tions. Are there phenomena in the way the stock market acts, at 
an}' time, which will convey an additional message, with reference 
to the propriety of buying or selling securities ? 

Price movements in the stock market operate in long swings. 
Some of these last several months; others, barring occasional reac- 
tions, several years. A rough idea of the movement can be gained 
from the familiar comparison with the ocean tide rising upon a coast. 
The flood advances slowly at first until it has made some headway ; 
recedes part way ; advances to a higher level ; again recedes, but not 
so far as before ; and then again advances, finally with a rush — the 
surface of the ocean broken continually by huge swells and the 
swells, diversified with smaller waves ; and at the end of the whole 
long rise, the coast beaten by heavy billows; the tide then turning 
swiftly and falling for a long time, the surface broken as before, 
and at the bottom of the ebb, the waves moderate or the sea almost 
calm. The comparison, which is not a new one, must be qualified 
in several respects, and mainly by the circumstance that the ebb 
runs more swiftly than the flow. 

163 



164 MONEY MADE IN SECURITY INVESTMENTS 

The major swings in prices correspond, as a rule, with the Cycles 
in general trade and industry ; but they begin almost invariably be- 
fore there is any important change in affairs at large. The first 
impulse in either direction is apt to originate among men who have 
large fortunes invested in banks, railroads and factories, and whose 
responsibilities are so vast, that they are compelled, both for the 
sake of their fellow stockholders and themselves, to watch closely 
every sign of coming changes, which may affect the prosperity of 
their corporations. They are the first, as a rule, to detect the cloud 
no larger than a man's hand, which may overspread the sky. They 
are the first to note the faint streaks of promise, which herald 
the dawn of a better day. 

Managers of the railroads, which traverse the grain and cotton 
fields, make it their duty to become acquainted with the condition 
of the growing crops from planting to harvest. Various interests in 
the financial world have their own independent service for collecting 
the same information. Officials of iron and steel companies are 
alert to every sign of a slackening or a more insistent demand for 
material ; and they note fresh eagerness on the part of buyers, or a 
cancellation of orders, before the public are aware of the facts. 
Bankers are necessarily the first to mark increasing courage on the 
part of merchants and to know whether they foresee good or bad 
business ahead. From a thousand sources of information, men of 
large means learn to forecast the future of business and earnings 
(and thus of stocks) and to adapt their own course to the coming 
changes. Most of the information, not all, but certainly most of it, 
is placed at the service of the public by the financial dailies and 
weeklies, whose keen and educated reporters are, from professional 
pride, as anxious to be the first to unearth and publish important 
data of this class, as are the bankers and capitalists to obtain them. 
If they are not apprised of every important fact as soon as the bank- 
ers, they are at any rate certain to discover it soon afterward and 
to publish it to the world in time for all practical purposes. 

Quiet buying of good stocks and bonds in times of depression by 
such men, and, conversely, quiet selling of such securities as are not 
needed for control, in a period of enthusiastic prosperity, mark the 
true turning points of the market. But such men are not by any 



TURNING POINTS IN THE MARKET 165 

means the only active factors in the stock market. Hundreds of 
keen, able and brilliant operators buy and sell stocks for the profit 
to be derived from their transactions ; and among them are several 
who conduct campaigns of great magnitude, for themselves or 
others. 

Some of these men aim at the actual control of corporations and 
may in the end retire from active speculation to become sober and 
conservative managers of properties. Commodore Yanderbilt and 
Jay Gould were of this class ; but, during the creation of their for- 
tunes, these two men of genius were daring operators in stocks, 
planning and managing great campaigns, although they were com- 
pelled to employ many brokers to carry out the details. At the 
present day, numerous men of kindred abilities are the leading 
operators. They have all grown into prominence since the Civil 
War. Nearly all are members of the local stock exchanges, in order 
that they may have the advantage of the smaller rates of commission 
on purchases and sales which prevail among fellow members. All 
of them possess fortunes won on the field of financial battle. 
Through long experience, they have become expert manipulators of 
the market; and their talents in this direction lead to the employ- 
ment of some of them, from time to time, by great financiers, for 
the conduct of important campaigns in stocks. 

Easily the prince of market manipulators was the late James R. 
Keene, a man of cool, sound, alert intellect, hard as steel, brilliant 
in execution, patient, and amazing in the extent and variety of his 
information. Long a successful manager of bear campaigns on his 
own account, and perhaps better fitted by temperament for that side 
of the market, Mr. Keene took the bull side in 1901 ; and it was he 
who marketed United States Steel, common, at from $45 to $55 a 
share. His other achievements have been as remarkable. 

CAMPAIGNS IN STOCKS 

It is such men as these who undertake the actual management of 
bull and bear campaigns. The market reflects their operations and 
purposes much more than it does purely investment buying and 
selling. Stocks are inert substances. They do not change in price 
of their own accord. They do respond to demand and supply, that 



166 MONEY MADE IN SECUEITY INVESTMENTS 

is to say to vigorous buying which reduces the floating supply and 
to an avalanche of selling which increases the amount afloat. They 
can thus be made to fluctuate tremendously in market value by a 
concerted campaign. 

It is to be noted that a campaign in stocks is a real and serious 
matter. If the security market did nothing except reflect leisurely 
buying and selling by actual investors, it would seldom move rap- 
idly in one direction or the other. But the market is not left to 
itself in this way. "Whether arising from the impatience of the 
American temperament, or from a desire natural to all men to have 
a thing over with and to attain results quickly, it is a fact, that 
whenever the force of circumstances dictates either a serious reac- 
tion or a rising market, the great financiers and leading market 
operators do not wait to let events take their natural, slow and 
orderly course. They promote the movement deliberately and pow- 
erfully, with a view to producing tangible results as soon as possible. 
For any such campaign, a number of important and delicate details 
must be arranged. Nothing is left to chance. Nothing is done 
haphazard. So far as is possible, every contingency is foreseen and 
provided for. 

No operator can appear in person on the floor of an exchange and 
transact all the buying and selling himself— at any rate, without 
revealing his plans to a certain extent. A number of brokers must 
therefore be employed. Each member of a pool must be instructed 
also, concerning the part he is to play in the buying and selling. 
Private inquiries must be made, which will bring to light, as far as 
practicable, the extent of the existing long or short interest in stocks 
in the large commission houses. It is also necessary, in some cases, 
to arrive at an understanding with the principal owners of a given 
stock, which is about to be manipulated. The plotting of a cam- 
paign involves a thousand other details. The general of an army, 
fighting his way into an enemy's country, never had a greater 
variety of preparations to make, than the man in charge of a great 
campaign in stocks. The pools, also, consult frequently and act 
together. 

No bull market will ever be undertaken until underlying condi- 
tions are ripe for one. There must be ample supplies of money and 



TUKNING POINTS IN THE MAEKET 167 

interest rates must be moderate, with liquidation virtually ended. 
It is upon these points, that an investor should fasten his attention. 
With reference to the banking situation, no one need ever be in the 
slightest doubt. Every man can read the signs for himself. As for 
liquidation, in any year, its conclusion is likely to be made public 
soon afterward. Brokers who issue market letters, newspapers 
which comment on market factors, and advisory houses which make 
it a business to guide clients in the buying and selling of stocks, are 
reasonably certain to know when liquidation has practically come to 
an end. When the groundwork is laid, as above indicated, for a 
rising market, an investor should promptly buy back the stocks he 
sold on a previous swing upward. 

The first care of the leader of the bulls is to make sure, so far as 
in him lies, that every speculative long account has been sold out, 
or that some large block of stock will not be thrown on the market 
at an embarrassing moment, and that the petty traders and the 
public have been pretty well shaken out. Prices are kept weak and 
made to look as though destined to go lower yet. The woman who 
bought, from the proceeds of a Pullman dividend, one share of 
United States Steel, common, around $20, as her private specula- 
tion, and sold it in despair at $9, just as the bull market of 1904 
was about to begin, was a perfect type of a great class of people, 
rich and otherwise, whose holdings the manipulator wishes to have 
liquidated, before aggressive bull tactics are resorted to. This is 
one reason, why the very first act, after improvement has actually 
set in, is often to put stocks lower than before. 

Thousands of- small traders, and investors who are at sea about 
Wall Street methods, may have held through the final dip in prices ; 
but it will not be an absurd expectation that they will hasten to sell 
on the first important rise. As these people have been proof against 
fright, an effort will be made to tire them out. This policy explains 
why, after the market has had a long and continuous decline, it is 
apt to remain utterly inert and paralyzed for weeks and even 
months. Great operators do nothing in a hurry ; they have infinite 
patience. During this period, prices fluctuate feebly and uncer- 
tainly. Quick slumps follow the rallies. A few stocks are put to 
new low records, even while the balance of the list is edging its way 



168 MONEY MADE IN SECURITY INVESTMENTS 

unobtrusively upward. Many owners of stocks have been in the 
habit of selling at such a time as this, tired out, disgusted, and 
fearful of even greater losses. Exactly when they ought to buy, 
they sell. It is what the manager of a bull campaign wishes. After 
the situation has been liquidated as thoroughly as possible, active 
operations for the rise begin. 

The small investor needs to wait patiently and watch carefully 
for such periods as these, which are turning points in the market, 
^hd are called and actually have the character of "periods of ac- 
cumulation." Banks, pools and the "big men" are buying, whether 
they advertise the fact to the world or not. Low interest rates, 
ample money supplies, and a sold-out stock market are irresistible 
temptations to organize an upward movement. When bad news no 
longer drives prices down, and underlying conditions are finally 
sound or promise to become so at an early date, the bear market is 
ended. 

In the early stages of a bull market, many devices are resorted to, 
having for their object to mystify the public and prevent them from 
buying stocks. So far as the pools have the power to do so, they 
withhold from view the favorable features of the situation. Heads 
are shaken and pessimistic interviews are supplied to the newspa- 
pers. Eumors of lower prices are afloat. Something seems to be 
"hanging over the market" and small buyers are unconsciously led 
to "wait until the situation clears up a little." Meanwhile, the 
formation of a short interest is sedulously cultivated. 

In due time, prices are shot upward a few points in two or three 
days. Those who are short wait to see what this means. Buyers 
think they will now go in, on the next reaction. In only too many 
cases, a reaction never comes ; and if it should do so, it is so abrupt 
and unexpected, that buyers are frightened and do not go in at all. 
Traders may even go short a little more. 

Two or three stocks are taken hold of, now, and advanced, gener- 
ally the high-priced ones, of which there is a limited supply in the 
Street and of which the general public have little or none. Later, 
another group is advanced. The "cats and dogs" have their turn in 
time. Then the standard stocks are again bulled. It is at this stage 
of the rise that a good manipulator shows to the best advantage. 



TUKNING POINTS IN THE MAKKET 169 

He keeps the market rising and gives it an appearance as if the rise 
were nearly over. Yet the tide continues to flow and a new "high 
record" is made every week or two by various good stocks. All these 
proceedings may have consumed several months or more than a 
year. Finally, in despair, thousands of buyers rush in and pick up 
their favorite stocks, sometimes just as the market is nearing its top 
for the time being. This is precisely the end at which the manipu- 
lator has been aiming. He must distribute his speculative holdings 
to the public or he will make no money. The market is kept active. 
Million-share days and even two-million-share days are witnessed 
at the Stock Exchange. "Now, at last^we have a great bull market." 
Under cover of the excitement, pools and operators unload their 
long stock on belated buyers or the wildly enthusiastic traders, and 
then slowly prepare for a ten to thirty point downward swing. 

At this critical period, a variety of devices are employed to 
restrain the public from selling. Dividends may be raised on popu- 
lar stocks. Eights may be given on others. Gold may be imported. 
Kumors are placed in circulation that certain stocks are "going up 
ten points" or more. Often, non-dividend payers and "wild-cat" 
stocks and even influential, high-priced issues are actually sent up, 
to give credence to the rumors. Finally, when a strong break comes, 
high money or some other plausible influence, temporary in its 
nature, is put forward as an excuse, and the break is even utilized 
to induce the public to buy more stock. 

These days of excitement are critical for an investor. Again he 
must study the banking situation and all the other points which 
need to be watched. A market, which will not advance farther on 
good news, is over with. A turning point downward is near at 
hand. Too much good news is always a bad sign, because the best 
news is apt to be saved for the culmination of a bull market. Many 
wise men sell out on general principles when the news is too good. 
If the newspapers are all bullish, if you hear from all your friends 
that stocks are going ten or twenty points higher, if even your 
clergyman and other persons who are entirely exempt from suspi- 
cion of an intentional desire to mislead, help swell the chorus, the 
time has arrived to sell out, especially if the market has had a long 
and continuous rise. And this has always been true, no matter 



170 MONEY MADE IN SECURITY INVESTMENTS 

whether the market went a little higher afterward or not. Too 
much good news, tremendous volume of transactions at the Ex- 
change, and universal bullish enthusiasm mark the culmination of a 
bull movement. This is the time when leading operators are selling 
their stocks to the public and it is called a "period of distribution." 

When prices can be put up no farther, rely upon it, that the in- 
siders are out of stocks and are preparing to put them down. No 
matter whether such a proceeding is harmful to business interests, 
no matter whether it actually brings on a great crisis, the writer is 
only stating the fact. A market which is going up no farther is 
certainly going down; and the speculators combine to carry the 
decline as far as possible, in order to reap a harvest of profits on the 
short side of the market. When a bear campaign begins, traders go 
short of stocks. To do this to advantage, they are obliged to sustain 
prices for a time, while selling more than they buy. 

One of the conspicuous tests of a successful operator is the ability 
to sell, while apparently buying. It may seem incredible that this 
can be done, yet it is an every day performance. "Washed sales" or 
"matched orders" are one of the agencies, through which the object 
is attained. Orders are telephoned simultaneously to several brok- 
ers. Some of them are directed to sell, others to buy. Each broker 
rushes to the post and executes his order, none of them aware of the 
orders of the others or that they all emanate from the same source. 
If his work is skilfully done, the operator ends each day in an im- 
proved position, having sold more than he bought, and the public 
no wiser or actually mystified. They may not do these things in 
Utopia. But this is the United States. Not long ago, it required 
washed sales of 300,000 shares to get rid of 30,000 Southern Kail- 
way stock near the top of the market. The New York Stock Ex- 
change has made a strong effort to put an end to "matched -orders" 
but has not succeeded in entirely eliminating the practice. 

While the insiders are getting out of stocks and going short at the 
top of the market, it is usual for a few selected stocks to be bulled 
to much higher figures, to attract attention and conceal the real 
designs of the big speculators. In 1903, just before the great break 
began, heavy advances took place in Delaware & Hudson, Southern 
Pacific, General Electric, Missouri Pacific and People's Gas. Mean- 



TURNING POINTS IN THE MARKET 171 

while, the professionals were all getting short of their favorite 
stocks. 

At the proper moment, all operations for the rise come to an end. 
Lacking their former support, prices commence slowly to fade away. 
Slow and feeble rallies are succeeded by rapid dips, in which prices 
go a little lower than before. When the decline has imperiled the 
ten point margins of stubborn and skeptical traders, more margin 
is called for by the brokers with the inevitable result that a quantity 
of stock is thrown overboard. A quick slump is the consequence. 
In. due time, heavier selling breaks out and the bear market is under 
full headway. Finalty, the twenty point margins are exhausted, 
more stocks are thrown over regardless of price, and there is another 
smash. Every outburst of liquidation carries the market farther 
down. From time to time, traders who are short cover their com- 
mitments and there is a smart but short-lived rally. On these ral- 
lies, the pools sell more stock. One terrifying break succeeds 
another, until, after months of confusion and loss, the bear market 
culminates and prices are again at the end of their swing. 

At the psychological moment, the strong come forward again, 
take hold and support the market by their purchases and the whole 
story is repeated. 

CLUES TO TUBNING POINTS 

It is the periods of accumulation and distribution, each one cover- 
ing several months, which mark the turning points and which an 
investor must watch for. He will be aided by close attention to 
underlying conditions and by the comments of conservative news- 
papers and bankers. An investor will lose nothing by training his 
mind to a habit of cynicism. In the famous Joe Millerism, the 
courtier was warned not to believe all he heard at the French court. 
An investor must not believe all he hears in Wall Street. He must 
look at conditions and judge whether the times ahead are favorable 
to stocks or the contrary. Wall Street always discounts the future. 
This he must learn to do also. 

A clue to turning points in the market is effectively supplied by 
charts. An investor is advised not to make a fetish of charts, as so 
many small traders do in Wall Street. It would be absurd to sup- 



1*2 MONEY MADE IN SECURITY INVESTMENTS 

pose that the whole meaning of the market can be read in charts. 
On the other hand, these diagrams are a graphic representation of 
what stocks are doing; and they reveal turning points clearly. An 
investor can obtain the material with which to make a chart, by 
taking a newspaper which prints a detailed list of all the sales, each 
day, on the New York Stock Exchange. 

A chart shows where a stock stands at any stage of the movement 
then in progress. If it is high, that is not necessarily a sign that it 
will not go higher. If it is low, it may go lower yet. But periods of 
accumulation and distribution are always indicated. A number of 
swings and turns at the top of a long rise, and especially a strong 
dip downward and a rally back to about the same high figures again, 
are held to signify distribution. At the bottom, which is commonly 
better defined than the top, a number of movements back and forth, 
with a rally of several points and a return to about the lowest fig- 
ures, is a sign, as a rule, that accumulation is going on and that in 
due time a strong rise will follow. 

Those who pin their faith entirely to charts believe that "double 
tops" and "double bottoms" are the things to look for. There is 
something in this; but it will not do to rely absolutely upon the 
pools and operators showing their hand too plainly through the 
charts. The main point is, that when a high top is made, followed 
by a decline, and the market rallies back to the top and refuses to 
go through, then that is proof that too much stock is for sale there 
and distribution is evident. At the bottom, when a return to low 
figures has taken place and the stock refuses to go much if any 
lower, then buying is indicated. The chart must be looked at 
broadly and must be considered with reference to underlying con- 
ditions and the general situation. 

Ruled paper can be bought in stores where mathematical supplies 
are kept, especially for the keeping of charts. 

TEADING MAEKETS 

Periods of accumulation and distribution, during which the actual 
turning point arrives for one of the periodical major swings in 
price, are attended for several days or weeks of what is called a 
"trading market." There is a confused oscillation of prices up and 



TURNING POINTS IN THE MAEKET 173 

down within a comparatively narrow radius of action. Quick trad- 
ers, who throng the commission houses, practice scalping profits of 
a few dollars a share by buying on the declines and selling on the 
rallies, while the trading market lasts, although they are generally 
compelled to take a loss on their final purchases. Occasionally, a 
trading market is introduced part way up or down during a great 
bull or bear campaign. Thus, a trading market signifies one of 
three things : 

1. End of a long and important decline, with slow reaccumulation of 
favorite stocks by private banking interests, investors, speculative pools and 
leading operators. 

2. Temporary derangement of the bull or bear operations, due to some 
transient development. Instances of this character were furnished by the 
reaction of April, 1905, when John W. Gates's corner in wheat failed; the 
setback in September, 1908, when the September election in Maine discour- 
aged business men temporarily and unnecessarily; the break in stocks in 
April and May, 1906, when the San Francisco earthquake frightened the 
holders of securities with the threat of enormous liquidation by the insurance 
companies ; and the setback, early in 1909, when keen competition in the iron 
trade caused U. S. Steel to proclaim ' ' open war in the steel trade. ' ' 

3. Culmination of a prolonged rise in stocks, attended by distribution of 
speculative holdings of pools and operators to an unwary and overenthusias- 
tic public. 

Every trading market is to be construed by "the rule of reason." 
Every atom of knowledge, judgment and experience must be 
brought to bear at such a time in solution of the problem, as to 
whether the trading market is a halt, a temporary interruption of 
the main movement of prices, or a culmination thereof. 

A chart will assist the investor materially to determine the mean- 
ing and boundaries of a trading market. There is only one of the 
numerous delineations of stock market movements, which an in- 
vestor or long pull speculator will find it convenient or useful to 
draw, to wit, a representation of the high and low prices, by weeks, 
of the particular stocks in which he is interested, or of a group of 
the six most active actual leaders, the ones upon which the specula- 
tion of the times converges. The investor can also draw the high 
and low, by days, if he wishes ; but the broader view is furnished by 
the high and low by weeks. A few instances of trading markets and 
turning points are presented on the following page. 



174 MONEY MADE IN SECURITY INVESTMENTS 



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TURNING POINTS IN THE MARKET 175 

END OF THE PANIC OF 1903 
Prolonged liquidation had taken place in 1903, aided by persistent 
and deliberate manipulation for the decline by interests, which had 
their resources free for the purpose. In September, however, the 
rails refused to decline any farther. In October, industrials resisted 
farther attack. During 11 weeks, covering those months, the six 
stocks shown in the chart vibrated back and forth in a 6 point trad- 
ing range. The rest of the market, not represented in the chart, did 
little, if anything, more, and, in fact, fluctuated in strict accordance 
therewith. Wall Street was, at the time, in the depths of gloom. 
There was no harmony among financial leaders. The air was full 
of predictions of much lower prices for stocks, of coming insolvency 
of corporations, and general prostration of trade. And yet, for 11 
weeks, stocks refused to drop below a certain average level, and they 
rallied resiliently after every raid by the bears. This fact alone 
would have suggested that stocks were at the turning point. 

A thorough and broad review of fundamental conditions supplied 
a correct interpretation of the trading market of September and 
October, 1903. First, the year's harvests were ample, slightly below 
previous high records, but much above the 10 year average. Next, 
general trade had suffered only moderately from the woes of Wall 
Street. Iron and steel were the worst hit, not so much by reason 
of the panic, however, as on account of protracted strikes in the 
building trades and temporary inability of the railroads to buy 
supplies freely. Every one knew this to be a transient phase. The 
tariff laws continued to favor protection to manufactures. Resto- 
ration of public confidence was alone required to revive manufac- 
turing, all along the line. Foreign trade was giving the United 
States a larger favorable balance (by from $20,000,000 to $60,- 
000,000 a month) than during the previous year, the enormous 
importations of materials for manufacturing having fallen off 
heavily. Gold was being imported freely. Railroad earnings, both 
gross and net, were comfortably larger, month by month, than even 
in the boom times of 1902. 

Now, in October, 1903, stocks were selling at prices which, on 
average, yielded an income as follows : 



176 MONEY MADE IN SECURITY INVESTMENTS 

26 rails: Income yield, 5.2 per cent; average dividend, 5.3 per 
cent. 

21 industrials: Income yield, 6.77 per cent; average dividend, 
5.54 per cent. 

28 preferred industrials: Income yield, 8.9 per cent; average 
dividend, 6.78 per cent. 

They were, on the whole, all on a good investment and speculative 
basis. 

Experienced observers knew that all the substantial fundamen- 
tals promised an early revival of business and a great recovery in 
prices after 1903. The trading market needed to be construed, 
therefore, as an evidence of an accumulation of stocks by leading 
interests, and the actual turning point for a rise. 



END OF THE PANIC OF 1907 

A glance at the chart will show a trading market in October and 
November, 1907, lasting about two months. That was a time of 
terrific excitement and extraordinary fluctuations in prices. Low 
as was the market, an effort was made to smash it yet farther by all 
the tricks at the command of seasoned operators. The one manipu- 
lator, who worked the hardest in that period to shatter every vestige 
of common sense and hopefulness left to the general public, retired 
after the panic, with a fortune of between three and four millions 
of his own, which they had allowed him to make in return for his 
valuable services, but broken in health ; and he spent most, if not all, 
of his time afterward, for years, in Europe. 

In that trading market, the movement of stocks was more con- 
fusing and excited than in 1903. The precise turning point was not 
clearly manifest at the time. The trading range averaged about 
$10 a share. In special stocks, frequent changes of $10 a share 
in price occurred in one day; and this went on until a consider- 
able part of the investment and speculative world became thor- 
oughly bewildered, utterly unable to discern what all this would 
lead to. That was part of the object of the sensational antics of the 
market. The big men were buying stocks by the ton, and did not 
care to have any one else pick the good bargains. 



TURNING POINTS IN THE MARKET 177 

When the panic of 1907 culminated, there were few crumbs of 
comfort in the immediate situation, for the investment world, and 
for those who prefer the bull side of stock speculation. Trade, 
manufactures and earnings had received a disastrous setback. 
Nevertheless, amid all the Stygian darkness of that period of deep- 
est gloom, an}' observer who had watched the stock market, calmly 
and dispassionately, would have noticed some things of great inter- 
est. Take the income yield of stocks : 

29 rails: Average dividend, 5.96 per cent; income yield, 6.75 per 
cent. 

25 industrials: Average dividend, 5.84 per cent; income yield, 
9.01. 

24 preferred industrials: Average dividend, 6.46 per cent; income 
yield, 9.23. 

Those facts alone indicated that stocks were on the bargain coun- 
ter. The crops of 1907 had been ample. Other conditions in 
October and November were as bad as could be imagined. Trade, 
manufactures and earnings had received a setback of unprecedented 
severity. Money was high, 7% per cent for long time loans and 
almost none to be had ; call money from 10 to 125 per cent, at times. 
The banking situation was awful and growing steadily worse. And 
yet, as the weeks passed by, the trading market continued. Stocks 
simply refused to go any lower. Finally, in the first week of De- 
cember, there was a smart break-away from the long deadlock, on 
the upward side. That was the signal that the turning point had 
been passed in the stock market. Thereafter, both industrials and 
rails were a purchase on every reaction, for handsome profits later, 
and especially after the secondary reaction, early in 1908. Liquida- 
tion had been so enormous, that monetary stringency was positively 
destined to vanish within a very few months, and did so vanish. 

THE TOP IN 1906 

At the culmination of the excited boom of 1906, the stock market 
fell into a trading position which lasted for 18 weeks. No man of 
experience could have failed to interpret the tremendous manipu- 
lation and the succession of furious million-share days at the New 
York Stock Exchange, as anything other than culmination of the 



178 MONEY MADE IN SECUKITY INVESTMENTS 

long and powerful rise and the actual turning point for a decline. 
St. Paul had risen until it was yielding only 3.69 per cent on the 
investment at going market value; Great Northern, 2.06 per cent; 
Delaware & Hudson, 3.09 per cent; and 29 rails an average of 3% 
per cent, the average dividend being 5% per cent. The banks were 
in perilous position. Money was high. Fundamentals were ad- 
verse and presaged the approach of a Crisis. When, in December, 
1906, stocks broke below the 18 weeks' trading range, the turning 
point had passed. 

TUENING POINT IN 1909 

In 1909, the trading market at top lasted 22 weeks. The banks 
were in bad shape. E. H. Harriman, one of the impelling spirits of 
the boom, had died. Financial powers were in discord. Income 
yield of prominent investment shares was below the current rates 
of interest on long time loans. Public hostility toward "big busi- 
ness" was acute. Stock exchanges were themselves under fire, on 
account of alleged iniquities practiced by speculators in those marts. 
A calm review of the whole situation would have established the 
meaning of the trading market clearly, as a turning point, and 
would have warranted all prudent men to sell their securities. A 
reaction was foreordained. Daniel G. Eeid's hilarious exploit of 
December 27th in shooting Eock Island, common, from 50% to 81 
and breaking it to 49% in half an hour's time, foolish, trivial, and 
episodal as was the whole affair, was itself a specimen of the antics, 
which characterize the ending of a boom in stocks. A drop in 
prices in January, 1910, below the trading range, was equivalent to 
an imperative order to investors to sell their securities, because the 
turning point had passed. 

TEADING MAEKETS, PAET WAY 

In essential features, these phenomena are all alike and can be 
interpreted by the conditions and developments of the times. Those 
of 1905 and 1906 were each brought about by a sudden and sur- 
prising development, which however, did not permanently change 
the drift of the times. 



TURNING POINTS IN THE MARKET 179 

In 1905, the temporary halt, reaction and trading market grew 
out of the unexpected collapse of John W. Gates's corner in May 
wheat in Chicago. Mr. Gates had forced the price of May wheat 
from 85 cents a bushel to $1.22, but he could not liquidate to advan- 
tage. He was deluged with wheat. In April, his associates and he 
abruptly threw large holdings of prime stocks upon the New York 
Stock Exchange, in order to obtain sufficient credit at the banks to 
bolster up their speculation in wheat. Actual liquidation, always 
dreaded by speculators, was so apparent, that the whole professional 
fraternity promptly sold stocks short, hastening the reaction, while 
Thomas W. Lawson of Boston published a sensational advertise- 
ment, headed "Panic Coming." The reaction was a sharp one, aver- 
aging $12 a share in leading stocks and amounting to $23 a share 
in Union Pacific. A trading market succeeded, lasting 6 weeks. It 
was easy, by reference to fundamental conditions and the income 
yield of stocks, to construe this episode as no more than a tem- 
porary interruption in the main slant of prices. 

In April and May, 1906, the San Francisco earthquake and fire 
led to a short lived panic and reaction. It was a performance of 
the same general character, as that of 1905, and could have been 
interpreted by the same methods. A four weeks' trading market 
finished the episode. 



Turning points arrive normally during trading markets and never 
otherwise, except when a sudden panic breaks out due to some un- 
foreseen calamity such as the general war in Europe in July, 1914. 
A trading market can commonly be resolved as to its meaning in 
the light of fundamental conditions, reinforced by chart indica- 
tions. During the stately progress of a great bull market, minute 
and daily attention to fundamentals and charts can be postponed. 
But in a great crisis, and after one, when the stock market falls into 
a trading position, then investors and all operators in securities 
must give close heed to a careful estimate of basic factors and to a 
chart of what the market is doing. 



XIII 

DULL DAYS AT THE STOCK EXCHANGE 

WHAT THEY PORTEND. — A FEW NOTEWORTHY EXAMPLES 

Extreme stagnation in investment and speculative operations at 
the stock exchanges is a phenomenon of marked significance 
and is the precursor of a coming strong movement in prices, con- 
structive or destructive. It is frequently, although not invariably, 
a trait of a turning point in the market. Because it is not so in- 
variably, the subject demands separate treatment. 

From time to time, there happens a week or a month, during 
which the market wends its slow way along as sluggishly as a muddy 
brook crosses a flat, when traders are tired beyond expression, and 
the public seem to have lost all interest in securities of every de- 
scription. Few of the real phenomena of the Street are without 
meaning; and to veterans, these dull periods are intensely interest- 
ing. They are not to be confounded with the mid-Summer and 
mid-Winter halts in the market. Trading is usually at a low ebb, 
twice a year — in the Summer, because of the vacation absences of a 
throng of traders and operators, and in December, owing to the 
distractions of the holidays. The phenomenally dull periods may 
coincide with one or the other of these halts, now and then; but 
what we are considering here is something different from the nor- 
mal mid-Summer and mid- Winter dull days, and from the com- 
parative smallness in the volume of trading after the frenzied 
excitement of culmination of either a great boom or a great liqui- 
dation. 

Citing the unusual periods, first, it may be said that extreme 
dullness in the stock market has preceded a serious break in prices, 
twice during the last twenty-five years. 

180 



DULL DAYS AT THE STOCK EXCHANGE 181 

In 1890, a prosperous and fortunate year in the early months, 
few clouds were visible on the financial horizon, except in the always 
troubled region of politics. The usual January rise and reaction 
had been followed by a good Spring rally, running into May. In 
July, there was almost a total cessation of trading at the New York 
Stock Exchange. The Silver Purchase act became a law in that 
month. Many traders in stocks had an idea that what the farmers 
believed might be true, that inflation of the currency would boom 
prices of stocks and commodities both. There was a pause to con- 
sider the situation. In July, sales at the New York Stock Exchange 
fell to an average of only 83,400 shares a day. Conservative men 
feared the consequences of the silver law and had stopped buying. 
Farther, the crops were not in good shape, owing to dry weather. 
The hesitation in the market foreran a fall. Europe was disturbed 
by our silver legislation and had troubles of its own besides. When 
prices began to move, they fell; and with the exception of a mild 
rally in August, an almost unbroken decline took place, lasting the 
remainder of the year and ending in a violent smash. Intense dull- 
ness in 1890, therefore, was one of the signals of an alteration in 
underlying conditions for the worse and foreshadowed a bear mar- 
ket. 

Another such instance was the extraordinary dullness in the 
Spring and Summer of 1896. After the Spring rally, the market 
fell into the doldrums. May 27th of that year is often referred to 
as almost a record day of only 65,700 shares. Prices had come up 
nicely from the low figures of 1895 ; but 1896 was a terrible year 
and any hesitation in the upward movement was an unfavorable 
feature. Apathy for a month or more, at a season when the market 
is normally active, was succeeded by a heavy drop in prices ; and the 
great break of August carried the level of the market down to the 
lowest point, known to the present generation of active men. To 
all appearances that low level will never be seen again, unless in 
consequence of some catastrophe in public affairs even more terrible 
than the war in Europe in 1914-15. 

These two cases are the only ones of importance within twenty- 
five years, in which an entire paralysis of the trading was the fore- 
runner of a serious decline in prices. 



182 MONEY MADE IN SECUEITY INVESTMENTS 

As a rule, intense dullness precedes a strong movement upward, 
no matter at what level the market is standing. 

In 1891, 1893 and 1894, the notable periods of stagnation coin- 
cided with the Summer vacation period. Condition of the crops 
played no certain part in the dullness of those months. Crops were 
excellent in 1891, poor in 1893, and good in 1894. July was prac- 
tically, in each of those years, the lowest point so far as prices were 
concerned. In the week ending June 30, 1894, sales did not go 
above 576,000 shares, making it probably the dullest full week of 
the present generation. On July 3d, sales were 60,200 shares. 
What that meant to brokerage offices may easily be imagined. Seats 
on the stock exchange suffered in value and pessimism was so ram- 
pant that many brokers thought their seats would be useful there- 
after only as heirlooms. In each of the years named, the stagnation 
was far greater than was normal. In each instance, it indicated 
definitely an end of liquidation, and was the precursor of booms in 
prices, which started when activity returned and gained momentum 
later. 

In 1895, the smallest volume of transactions was recorded in 
January and February. Sales averaged about 120,000 shares a day. 
Utter and hopeless inertia had settled down upon the market. No 
broker was earning his salt. This was, however, the end of a seven 
months' decline, liquidation was over, the situation had cleared up, 
and, with trifling reactions, prices rose then until September. 

In 1900, when the average of railroad stocks was higher than at 
any time for ten years (except for a few weeks in 1892 and 1899), 
the month of August was excessively dull. Drouth had affected the 
wheat crop and the allied armies were besieging Peking. August 
22d sales amounted only to 86,000 shares. The average for the 
month was about 150,000 shares a day. On the worst six days, 
trading reached a total of only 672,000 shares. The intense dull- 
ness of August meant that, after a run of twelve months, liquida- 
tion had completed its course. Stocks were in strong hands. 
Important interests were maturing plans for a bull market; and, 
after a short and sharp shake-out, there followed a steadily rising 
market until the May panic of 1901. This was a typical case of the 
usual sequence of great dullness in the stock market. 



DULL DAYS AT THE STOCK EXCHANGE 183 

In the exciting bull market of 1902, the dull month was June. 
In one week, sales did not go above 1,325,000 shares. From the 
1,995,000 shares of April 21st, sales had fallen off to 178,400 shares 
on June 9th. The public were being subjected to the tiring out 
process. The bull party had a tight rein on prices; and men who 
were shrewd enough to put the proper interpretation on the phe- 
nomenal dullness of June, 1902, were lifted to wealth before the 
frosts came. June was the month just before the great upheaval in 
prices of good railroad stocks to prices three and four times greater 
than the figures at which they sold in 1896. 

March 10, 1904, was the smallest day in eight years. The whole 
period from March to June, both inclusive, was, in fact, extraordi- 
narily lean for stock brokers, whose income is derived from the 
buying and selling of securities by their customers. In the week 
ending March 5th, total sales at the Exchange in New York 
amounted to only 942,570 shares. March 10th, sales fell to the 
negligible and extremely low figure of 74,700 shares. During the 
last week of April, total business at the Exchange in New York 
aggregated only 1,070,000 shares. On June 28th sales of 87,900 
shares only were reported. 

The panic of 1903 had ended. A fine rally into January had 
taken place and then prices drooped nearly to the low level of 1903. 
Prices held their own but there was no buying. As a matter of fact, 
March was the turning point in the market. Liquidation had ended. 
The Northern Securities case had been decided (against the Union 
Pacific interests) and the bad news did not depress the market far- 
ther. A realizing sense of the situation finally dawned on the bear 
part} r , which hastened to cover its short sales. A new era of higher 
prices dawned on Wall Street; and later, the market rose to the 
highest point ever known, exceeding the high average of 1864. 

Phenomenal dullness also reigned in Wall Street in June, 1905. 
A reaction had occurred in May and prices had started upward 
again. Such persons as had not sold their long stock during the 
previous break were tired out, as far as possible, by a dullness and 
apathy which seemed to presage another fall. During the week 
ending June 17th, total sales on the New York Exchange amounted 
only to 1,794,455 shares, little more than one full day's business in 



184 MONEY MADE IN SECUEITY INVESTMENTS 

times of active manipulation. On the 15th, 134,400 shares were 
done. Drowsiness fell upon the market, the stock ticker, and all 
things animate in Wall Street. On the 17th, Saturday, 82,920 
shares were dealt in. Since then we have had over a million shares 
on a Saturday. On the 17th, St. Paul changed in price just %th 
of a point ; Union Pacific, 14th ; and United States Steel, preferred, 
%ths — all magnificent stocks whose enormous volume on an active 
day is a feature in all furious trading. That was the record for 
extreme inactivity of movement in the stock market. There could 
be nothing worse than that. There never was anything worse ex- 
cept perhaps on March 12, 1888, the famous day of the blizzard, 
when practically no business was done on the exchange, sales being 
only 15,250 shares. The stagnation of June, 1905, meant, what it 
usually does, a strong movement upward as soon as activity re- 
turned. 

In 1908, comparative dullness prevailed in the buying and selling 
of stocks for a few weeks before the great rise of the year began, but 
the volume of sales was not notably small. 

In November, 1913, however, another example of extreme dull- 
ness was recorded. Stocks had. declined substantially from the top 
of 1912 until June, 1913. They had had a smart rally on short 
covering, followed by the secondary decline which is a characteristic 
trait of the stock market. In November, bottom of the secondary 
reaction was indicated by a complete end of liquidation and a num- 
ber of small share days. On Monday, November 24th, dullest day 
in twenty-five years, sales at the big Exchange in New York fell to 
57,600 shares. This was the point from which started a vigorous 
rise into the following January. 

Enough has been said to show the importance of paying careful 
attention to periods of remarkable dullness in the stock market. 
They may be turning points. It is imperative at such times to 
search closely into underlying conditions. If those conditions are 
sound, a great rise is ahead. If they are dangerous, there may be a 
flicker upward just after the resumption of active trading, but the 
market is bound toward a lower level. 

With reference to intervals of dullness in the trading, it may also 
be said that the same phenomenon is watched for, each day, by 



DULL DAYS AT THE STOCK EXCHANGE 185 

those who wish to profit by small turns in prices. If, on a rally, 
active trading stops or falls dull for an hour or more, that is gen- 
erally held to signify a coming turn downward of a few points. 
Per contra, if trading falls dull, after a break, and prices refuse to 
go any lower, those who are short cover at once and play for an up- 
ward turn. 



XIV 

NORMAL YEAELY MOVEMENTS OF PRICES 

AT LEAST TWO SWINGS UPWARD, AND TWO DOWNWARD, IN EVERY NORMAL 
YEAR.— THEIR CAUSES AND EXTENT 

IN" a previous chapter, attention has been directed to the great 
movements in prices, which extend over a series of years, grow- 
ing out of the alternation of good and bad times. 

Another peculiarity of stock market movements is now worthy of 
attention. 

When, at the end of a serious depression in business, good times 
are seen to loom large ahead, there occur years, like 1862, 1879, 
1885, 1904, 1908, and 1915, during which stocks whirl rapidly up- 
ward, with only the most trivial reaction, for six months or a year. 
This is generally due to the popular enthusiasm and exultation over 
the return of good times, and to the existence of a large short inter- 
est in stocks, which the manipulators will not permit to cover except 
at high prices. The market starts to ascend, keeps going and never 
comes backward. 

In other times, the progress of a panic, a dangerous position of 
bank reserves, high interest rates, and frantic liquidation cause 
prices to tumble steadily for twelve months or so, with only the most 
feeble and uncertain rallies. Such years were 1873, 1876, 1890, 
1893, 1903, 1907, and 1910. 

In the majority of other years, however, when conditions are 
fairly stable, whether good or bad times prevail, and when either 
accumulation or distribution by prominent interests is going on, 
stocks follow a different course. There are always several turns in 
prices every year, due to manipulation by speculators; but certain 
movements are notable and are expected and worked for by traders. 
In normal markets, there are at least two strong swings upward in 
stocks, and two downward, every year. 

186 



NORMAL YEARLY MOVEMENTS OF PRICES 187 

Let us consider the upward movements first. 

Fundamentally, they grow out of the fact, that on or about the 
first of January and July, the holders of stocks and bonds in this 
country receive the enormous sum of $270,000,000 or more in divi- 
dends and interest on their security investments. Some distribution 
of this character takes place, indeed, every month, the sum ranging 
from $110,000,000 to $140,000,000. But at the beginning and in 
the middle of the year, the disbursement is especially heavy ; and it 
tends to grow larger, year by year, as the country gains in wealth 
and prosperity. 

The principal part of the great sums in cash referred to is neces- 
sarily devoted to the expenses of living. A part is expended in 
travel and recreation. Some of the money goes into real estate, life 
insurance, private business, and diverse forms of other investments. 
On the other hand, many millions go toward the purchase of securi- 
ties. Thousands of people put from $1,000 to $5,000 into stocks or 
bonds; men of large estates, banks and insurance companies put 
from $100,000 to $1,000,000 into this class of investments. The 
demand for good securities is therefore much more active at the 
time of, or just after, the January and July disbursements than at 
other seasons. It is a distinct phenomenon in finance. By con- 
certed action, operators in stocks advance prices during those two 
periods (if a panic does not prevent such a venture) with a view of 
selling to the public, at good prices, the goods they have bought dur- 
ing a previous reaction. The Spring and Fall booms are cherished 
traditions of Wall Street. 

Old hands at the business do not always wait until their dividends 
and interest have actually been paid to them. If the general outlook 
is favorable, they begin to invest in June or December, carrying 
their securities on a margin until the cash comes in, when they pay 
outright for the securities and take them out of the market. More 
conservative people wait until they have the money, and then, after 
deliberation, they buy. 

In every normal year, since 1860, a considerable rise has been 
engineered from some break in the Fall or December, into January ; 
and, as a rule, after a moderate reaction, the rise has gone on into 
the Spring. The slow movers mount from $5 to $20 or more a 



188 MONEY MADE IN SECUKITY INVESTMENTS 

share. The lively stocks rise from $30 to $50, or more. January is 
top of the acclivity in panic years. At such times, the Spring rise 
amounts to little. 

The second rise is an incident of the Fall months. It is always 
equal in extent to the Spring rise, and, of the two, the Fall rally is 
generally the more important. Stocks start from some low level in 
the Spring or July and climb upward into August. Then, fre- 
quently after a reaction, they often go higher yet, into September or 
October. The Fall rise is seldom omitted even in a bad year. If 
business is bad, or technical conditions unfavorable, the boom may 
be postponed until October or November, but come it will, sooner or 
later. In the reactions of 1873 and 1890, indeed, the struggle to put 
the market up in the Fall was a failure. But there was a good 
rally in 1893 ; and even in 1903, when the "rich man's panic" had 
cut many fortunes down a half, the Fall rally was one of great 
spirit, having been promoted by the declaration of William Kocke- 
feller, that if stocks should go up five points (which they did easily) 
they ought to rise twenty points (which some of them did, very 
nearly). 

No exact date can be named as certainly the top of the Spring or 
the Fall rise. Something depends in each year on the market posi- 
tion of the various pools and leading operators. If they have not 
yet liquidated to advantage the stocks they have accumulated, the 
market is apt to be maintained on as high a level as possible until 
the desired end is achieved. April has, however, usually seen the 
end of the Spring boom in stocks and September the Fall boom. In 
the latter season, the top has sometimes been reached in October or 
November. 

Men of long experience never part with the stocks which give 
them a position in their corporations, merely for the sake of a mod- 
erate turn in the market; but, in favorable times, they almost al- 
ways have transient holdings, which they sell in the Spring and 
Fall months, taking them back during the next good reaction. The 
number of men who carry not only moderate amounts of stock, but 
from 5,000 to 20,000 shares, for the sake of the normal yearly turns, 
has grown immensely within the last twenty years. 

Normally, there are also at least two undulations downward in 



NOEMAL YEAELY MOVEMENTS OF PKICES 189 

prices in every twelve months. A variety of causes contribute to the 
result ; but in past years, both could have been attributed mainly to 
money stringency and the crop situation ; and it is to be noted that 
speculators and pools always play for these reactions, if the times 
do not entirely forbid. 

The serious nature of a crop shortage is well understood. Spring 
and Summer are the seasons for crop scares. Fortunate, indeed, are 
the farmers, if a whole year passes by without weather conditions at 
some time unfavorable to the growing grain, cotton and tobacco. 
They no longer fear the old time plague of grasshoppers, but they 
have other troubles. The boll weevil in the South may make a dif- 
ference in the output of cotton; and rust, a mild Winter, the Hes- 
sian fly, drouth in the hot season, and unseasonable frosts have not 
lost their terrors. If other influences have conspired to abate the 
ardor of those who are long of stocks, sudden alarm as to the crops 
would mean a sharp and serious decline in prices. 

In 1890, the corn, wheat and cotton harvests were small ones ; and 
this was one of the forces which led to the bad break of that year. 
In 1901, hot winds in Kansas and drouth elsewhere caused a fall of 
$22 to $43 in granger railroad stocks. During such declines, other 
good stocks fall in sympathy. 

It must be distinctly kept in mind, that if traders want a reac- 
tion, they seize instantly upon any unfortunate development to 
bring about the end desired. 

Violent downward flurries on crop shortage are usually tran- 
sient, if general trade is good, because a loss of grain tonnage may 
be offset by other traffic. A notable case in point was an incident of 
1901. A group of large holders of Atchison and other granger 
stocks in New York were confronted with serious loss in conse- 
quence of the crop scare of that year in July. Troubled and 
anxious, they sent envoys to the West to study the situation on the 
spot. Mr. Armour was consulted with reference to the value of the 
opinion of President Eipley of the Atchison road. Mr. Armour 
assured his visitors with an almost religious solemnity of manner, 
"Mr. Ripley is the best railroad president in the United States." 
When the envoys called at the office of the head of the Atchison sys- 
tem, Mr. Eipley replied: "No, we have no corn; but we have oil; 



190 MONEY MADE IN SECUEITY INVESTMENTS 

oil will compensate for the loss of corn." New business was coming 
forward, and the New Yorkers were advised to hold on. They did 
so, and made money later on their granger stocks. 

It is in the early Spring, that the financial world begins to be 
concerned with regard to the crops. April, May and June are 
usually months of uncertainty. Hundreds of cautious investors sell 
their stocks during the Spring rise, therefore, preferring to buy 
them back, if necessary even at higher prices, when doubt has ended. 

Other influences which operate after the Spring rise are the 
higher rates of interest, which prevailed before the Federal Eeserve 
system was established, in consequence of the demand for ready 
money among the farmers, and the coming vacations of a swarm of 
men, who are off to Europe, the sea shore or the woods for rest and 
recreation, and who all get out of their speculative holdings of 
stocks before going. 

Selling by any large class of men inspires similar action by 
others; and there is in every normal year a decline from the high 
prices of the Spring running into May or June, and sometimes into 
July. It is not uncommon for lively trading stocks to descend in 
price $15 or $20 a share. It must be said, however, that if the 
promise of the crops is definite and splendid, the Summer reaction 
will be extremely moderate, other things being equal. 

A second swing downward has heretofore occurred in the Pall. 
It has been primarily due to a scarcity of loanable funds in New 
York at that season and has been promoted by pools and specu- 
lators. The West and South require large sums of ready cash to 
pay off the harvest hands and others and to start the first shipments 
of produce to market. Those sections were formerly in the habit of 
drawing down their balances in New York and other central cities ; 
and other sums, large in the aggregate, were withheld from deposit. 
While the banks of the West and South are expected to finance the 
farmers and planters in the Fall months, they could not do it before 
1914 without recalling millions of their surplus money from the 
East; and they began to draw in August. The total amount sent 
away from New York for harvest purposes, each Fall, varied with 
the size of the crops. It was seldom less than $20,000,000 and has 
been in excess of $50,000,000. 



NORMAL YEAKLY MOVEMENTS OF PRICES 191 

Such an outflow of ready cash forces the rate of interest on loans 
of all kinds at commercial centers much higher for two or three 
months. If trade is active, call money rises to 8 or 10 per cent in 
New York and the rate frequently soars to 25, 30 or 35 per cent. 
In December, 1905, in New York, before the current of remittances 
had turned toward the East again, call loans once rose to 125 per 
cent. Whatever the actual interest charge, traders find it desirable 
to sell their long stock, and even go short of the market, when rates 
are rushed up to 8 per cent or more. These operations have been 
the primary cause of the Fall swing downward. 

The September reaction is a tradition in Wall Street. It quite as 
often occurs in October or November, but sooner or later it arrives, 
in a normal year. An unfortunate turn in the State elections in 
September has occasionally assisted to precipitate the Fall reaction, 
as in 1908. There is often another break in December, owing to the 
high rates which prevail when the banks are accumulating money 
for the January disbursements. 

When other people have sold, and the market is depressed, those 
who wish to take advantage of the January rise buy good stocks, 
lay them aside, and wait patiently for the better prices, which are 
sure to come, if business is good and the outlook free from serious 
complications. 

In 1915, lacking the old time scarcity of loanable funds and the 
high rates of interest common in the Spring, the reaction usual at 
that stage of the year was brought about by a war scare over the 
sinking of the steamship Lusitania, which supplied the excuse for 
a slump of 8 to 20. dollars a share in steady going investment issues 
and from 10 to 30 dollars a share in the war order stocks. What- 
ever reactions took place in the Fall of 1915 were due merely to 
profit taking by speculators on the war issues mainly. 

Bonds are less affected by these yearly movements than stocks, 
but are not altogether indifferent to them. Many men who can get 
10 to 20 per cent on call loans are tempted to sell their bonds and 
put the money out at interest until the flurry is over. Selling, what- 
ever the cause, if in any considerable volume, always depresses the 
market. 

It is perfectly legitimate for an investor to take advantage of the 



192 MONEY MADE IN SECUKITY INVESTMENTS 

normal oscillations of the stock market. In fact, it is sometimes of 
the greatest importance that he should do so. Every great boom in 
stocks since 1860 has culminated at the top of either the normal 
I Spring rise or the one in the Fall. Every considerable decline, in 
times of panic and depression, has ended after either the Spring or 
Fall break. The turning points of the great major movements in 
stocks, growing out of good or bad times, coincide as a rule with the 
turning points of the normal yearly swings. If fundamental condi- 
tions are such that a coming change in the trend of business affairs 
(and therefore of stocks) is indicated, an investor will be safer to 
sell, or buy, when the market is about to turn. 

An investor will, as a consequence, pay calm and diligent atten- 
tion to the broad features of the situation and will be constantly on 
the alert for those signals of finance which tend to show what the 
trend of events is likely to be for the next few months or the next 
year or so. He will disregard entirely the numberless twists and 
small turns in prices which occur from day to day and week to week. 

Whether or not the growing strength of the Western and South- 
ern banks and the new Federal Eeserve system will serve to elimi- 
nate the normal Spring and Fall reactions, time alone will decide. 
Certainly, money stringency in New York at those seasons of the 
year will probably be avoided hereafter in normal years. So firmly 
fixed, however, in the minds of speculators, is the idea of Spring 
and Fall reactions, that they may continue to be brought about by 
an overbought condition of the stock market and by profit taking. 

An investor needs hardly to be advised on one point, yet for a 
definite understanding the matter may be mentioned. If the finan- 
cial position is strained and stocks have started downward strongly, 
and if he has sold on the January or Spring rise, there will be no 
advantage in buying until July or the Fall months. It will not do 
to buy on the Spring reaction, because the market is certain to go 
lower before the movement is ended. On the other hand, if the 
market has been falling violently for six months or more, and has 
entered finally upon a period of comparative stability or an actual 
rise, and if the financial situation has eased and money is abundant 
and interest rates are low, then it will seldom pay an investor to try 
and catch the three months' turns. After a bad smash, the market 



NOKMAL YEAELY MOVEMENTS OF PEICES 193 

is apt to have a strong rise for a year at least. An investor will do 
better not to sell until prices have improved materially and at the 
occurrence of a strong Spring or Fall rise. 

On account of its bearing on the subject of normal yearly move- 
ments of prices, the following statement of the characteristic traits 
of each month of the year will be of interest : 

January: This is proverbially a month of higher prices. In all years, 
when conditions are ripe for panic and depression, the apex of market 
values for that year is recorded in January, as was notably the case in 1861, 
1865, 1873, 1876, 1903, 1907, and 1910. In 27 years since 1890 inclusive, 
January prices have been higher than in the preceding month, 17 times. 
They have been top of the year, 6 times. While investors are in January 
applying their surplus funds, arising from the huge January disbursements, 
to the purchase of securities, speculators who had previously bought in 
anticipation of the January investment demand selling out. A reaction in 
the latter part of January on speculative profit taking is a common occur- 
rence. Cash flows from the interior into New York during January; and 
bank reserves tend to increase and interest rates to go lower. When banking/ 
and other conditions are bad, a reaction in January is a sign of comingj 
troubles, especially after a great bull market the year before. 

February: In the last 26 years, the stock market has recovered from the 
January reaction, or has continued the January rise, giving the month higher 
prices than in January, 12 times. Except in powerful bull years, February 
habitually witnesses a reaction on dullness in trade and speculative profit 
taking. This is especially true in years when money is high and when the 
growing Winter wheat crop has been damaged by unfavorable weather. 

March: In panic years and bear markets in the last stage of a Cycle, the 
downward trend of values becomes pronounced in March. March has in the 
past been a month of falling bank reserves and higher money, in consequence 
of the flow of cash to the interior for payment of farm labor and supplies 
for the planting season. Interest rates have been high in New York. This 
influence may hereafter be nullified by the new Federal Eeserve system and 
by the enormously expanded strength of the Western and Southern banks, 
which now aim to finance planting and harvest in those sections themselves. 
March is habitually a month of reaction in the stock market, followed by a 
start for the normal Spring rise. In strong bull years, March continues the 
upward swing of prices. It is on these two accounts, that in 26 years past, 
March prices have risen slightly higher than in February, 15 times. 

April: This month is characteristically the occasion for the Spring rise; 
and the rise is more or less substantial, according to the promise of the crops 
as indicated by the area planted and by weather conditions, and according to 
the stage of the current Cycle and other circumstances, favorable or other- 
wise. The great rise in April, 1915, was due to the promise of enormous 
profits to manufacturers of war munitions in this country and the almost 
unprecedented prices paid by Europe for American grain and flour. It was 
also coincident with the beginning of a new Cycle. In 26 years past, April 
prices in the stock market were not lower than in March, 18 times, and were 
in almost all cases much higher. After April, market values tend lower for 
a time, except in powerful bull years, when nothing can stay the irresistible 
"advance in stocks, as in 1902 and 1908. The Spring boom in general trade 
culminates in April. 



194 MONEY MADE IN SECURITY INVESTMENTS 

May: May sometimes continues and carries to its culmination the Spring 
rise, the stock market being higher than in April. This has been the case in 
12 years out of the past 26. May is, however, normally a month of reaction, 
partly due to speculative profit taking. Unfortunate accidents in affairs, 
such as the corner in Northern Pacific in 1901, the San Francisco earthquake 
in 1906 and the sinking of the Lusitania in 1915, with other incidents of an 
untoward nature, inevitably precipitate a reaction in May or at least furnish 
an excuse for what would have happened in any event. In May, the promise 
of the crops begins to be distinct; and any shattering of the hopes of the 
farmers and financial world, as to the crops, aids in promoting a May reac- 
tion. In normal years, the trading fraternity in Wall Street begins to look 
forward to the Summer vacation time; and the more cautious ones sell out 
their speculative holdings, on the principle of being out first. This selling 
is one of the influences, which promote the May reaction. In panic years 
and bear years, the stock market has invariably been lower in May than in 
April. Summer dullness in trade begins in May. 

June: June is commonly a period of hesitation in the stock market. 
Balances in foreign commerce are small; gold exports are the rule in normal 
years. A vast multitude of well-to-do persons are preparing for vacation 
absences from town; and speculators clear out their speculative holdings of 
securities. In June, extent of the cotton planting becomes known and 
preliminary estimates can be made as to probable grain production of the 
year. In June, stocks respond to the particular circumstances of the time, 
but seldom enter upon an important rise. In fact, it is only when funda- 
mental factors are exceedingly strong, that June is a month of rising market 
values. In 26 years, June prices have been somewhat higher than in May, 
14 times. In all other years, they have been lower or merely on a parity 
with May. Panics almost never culminate in June, but bear markets some- 
times do, as in 1860, 1882, 1884, 1900 and 1913. 

July: July is the month of vacation absences, crop scares, reduced rail- 
road traffic, small balances in foreign commerce, and about half the time of 
gold exports. It is notably a month of dullness in the stock market and of 
small volumes in the trading. It is the month in which wise men buy stocks, 
if conditions are promising. Bear markets often culminate in July, as in 
1860, 1889, 1893, 1898 and 1910. Culminations of a bull market are 
practically never known in July. In the past 26 years, July prices have 
been somewhat higher than in June, 11 times only. In other years, they 
have been lower or on a parity with June. The Fall rise finds its inception 
in July. 

August : In August, Summer apathy is at an end. Thousands of persons 
return to their homes from vacations. The huge July disbursements have 
begun to stimulate investment buying. Speculators take on stocks with the 
object of selling them at higher prices to investors. Condition of the cotton 
and grain crops is, by this time, well understood. If the soil and the 
weather combined have refused to produce vast agricultural wealth, the Fall 
rise is moderate; if, on the other hand, the promise is brilliant, the stock 
market fairly booms in August. August is the month of the Fall rise. 
There has been an excellent advance from the low prices of July, for at least 
a part of the month of August and commonly during the whole month, 18 
times in the last 26 years. Prices have been lower or on a parity with July, 
8 times. In 1863, 1870, 1884, 1889, 1895, 1902 and 1909, August saw the 
highest prices of the whole year; in 1878, 1883, 1896 and 1914, the lowest 
of the year. While the exchanges were closed in August, 1914, an open 
market for securities was established on New Street, in New York, and the 



NOKMAL YEARLY MOVEMENTS OF PEICES 195 

level of prices in August was lower than in July. If the August rise halts 
the last ten days of the month, there is usually a reaction thereafter. Cash 
begins to go out to the grain and cotton States and interest rates rise in 
New York. 

September : Depending upon fundamental factors, the Fall rise frequently 
lasts into September and has done so in 12 years out of the past 26. This 
is a month of great profit to the railroads, on account of the rush of the 
crops to market. A reaction in September, in consequence of speculative 
profit taking and farthered by any untoward occurrence in affairs, is almost 
an invariable rule, however, such a reaction having been witnessed in 20 
years out of 26. Bull markets seldom culminate in September, because in 
spite of the normal September speculative shake out, if conditions are favor- 
able, the broad trend of stocks continues on the upward slant until three or 
four months later. In 14 years out of the past 26, the stock market has 
either been lower than in August or on a parity with August. In bear mar- 
kets and panics, culmination of the long and frightful downward swing of 
prices takes place, as a rule, somewhere in September, October or November. 
In 1911, the bear market ended in September. 

October: This month bears the evil reputation of being customarily a 
period of reaction. Even when a powerful bull movement has run on into 
October, as it has done 10 times in the last 26 years, the month frequently 
ends in reaction. In 26 years, October has been lower than the month be- 
fore, 13 times; on a parity with September, 3 times. The panics of 1903 
and 1907 culminated in October or within a few days thereof. October is 
always a critical month. Foreign trade balances in favor of the United 
States are generally the largest of the year in October, and gold is usually 
imported. But cash continues to leave New York for the grain and cotton 
States. 

November: High prices for the year were seen in the month of Novem- 
ber, in 1896 and 1899. Low prices of the year, in 1890 and 1897. November 
follows the October reaction aud precedes preparations for the January rise. 
It is a month in which little happens in a general way; but if conditions 
promise a substantial January rise, wise men begin to reinstate holdings 
which were sold in October or the month before. In strong bull years, there 
is a substantial recovery from the October reaction or a continuance of the 
bull campaign. Hence, in 26 years, prices have been higher in November 
than the month before, 9 times; lower than in October, 10 times; on a vir- 
tual parity with October, 7 times. Eailroad earnings are always at the crest 
of the year in November, in consequence of the crop movement. Balances in 
foreign commerce are usually nearly as large as in October; once in a while, 
larger. Gold is imported normally. Cash begins to return from the agricul- 
tural districts to New York and money rates ease in normal years. 

December: Prior to establishment of the Federal Eeserve system for the 
National banks, December was usually a month of tension in the money 
market. Corporations and banks prepare in December for January's huge 
dividend and interest disbursements. Hence, reactionary tendencies are 
frequently observed in December. In 14 years out of 26, December prices 
were lower than those in November, on average, and were higher in only 12 
years. In six of those years, namely, 1898, 1900, 1904, 1905, 1908 and 1915, 
standard investment shares were at their highest for the year in December, 
sustained bull markets having been in progress. The December reaction is, 
however, not usually of great importance, certainly not when the financial 
world is beginning to recover from a panic. The December reaction is 
ordinarily a mere speculative shake out, preparatory to the January rise. 



XV 

WHEN TO BUY 

WHAT CONSTITUTES THE EVIDENCE. — STATISTICAL KNOWLEDGE DESIRABLE.— 
DOCTRINE OF FIVE-YEAR AVERAGES.— REACTIONS, HALF-WAY BACK.— A CODE 
OF RULES FOR BUYING 

IT is taken for granted that an investor or an operator has sold 
stocks and bonds at remunerative prices during the boom at one 
of the crests of a Cycle, and wishes to reinstate his holdings lower 
down; or that, at some stage during a Cycle, he has come into the 
possession of funds, not essential to maintenance, which he wishes 
to invest safely and profitably. It is presumed, also, that he will 
confine his dealings to standard, respectable and long established 
securities, and that he will know something about them. In order 
to increase his capital, he must buy securities when they are cheap, 
all things considered, and around the approximate bottom of a 
strong decline. 

An investor will gain nothing by haste, by acting on impulse. 
Nor will the long pull operator. Patience, the infinite patience 
which characterizes the security transactions of dominant and suc- 
cessful spirits in finance, is always the most profitable of all virtues 
in Wall Street, and conspicuously so while waiting for the time to 
buy. By proceeding in a cool, matter-of-fact way and waiting for 
clear indications, the purchaser of securities will commonly be able 
to buy many dollars a share less expensively than he would other- 
wise. Safety of capital can only be assured by buying when securi- 
ties are practically at their cheapest and when there is a prospect of 
higher prices for them. This cannot be insisted upon too strongly. 
In any event, one will often save the equivalent of more than a 
year's dividend by patient delay, and a man who cannot wait for a 
decline has no business to put money into securities. If, in addition 
to safety of capital, a man wishes to add an increment to principal, 

196 



WHEN TO BUY 197 

he must certainly wait until a reaction has practically reached a 
standstill and must certainly not buy during the whirl of a furious 
rally. 

While awaiting his opportunity to buy, the intending buyer of 
securities can amuse himself and add to his efficiency in investment 
by certain transactions in the comfortable seclusion of his library, 
if he is a man of leisure, or, if he is a man of affairs, by having the 
work done for him by an employe. He should obtain certain statis- 
tical data as to the stocks and bonds he proposes to buy, and should 
draw a chart of their movements in price for a few years past. 

STATISTICAL FACTS, DESIRABLE 

Investment and speculation can be reduced to a science, wherein 
as little as possible is left to chance. The man of large means sim- 
ply tempts fate unless, to begin with, he knows exactly what he is 
buying and what he is buying it for. The pools and conspicuous 
operators leave as little as possible to chance or accident. They 
know all there is to know down to the last iota of fact. To pattern 
one's own strategy upon the example of successful conquerors is the 
aim of every warrior. A part of an investor's preparation to buy 
should be to know what he is buying. No thrifty man would be- 
come part owner in a dry goods store, a factory or a shipyard with- 
out having first examined the books and accounts and gained a 
thorough comprehension of present status and future possibilities 
of the business. Why then should he enter a corporation without 
preparation? It is suggested that a scrap-book or portfolio be col- 
lected with reference to each stock or bond the intending purchaser 
has in view, and that a statement be prepared for each portfolio, 
which will set forth the vital facts as to intrinsic and speculative 
value. The skeleton form, set forth below, will serve to build upon. 
Statements can be made as elaborate as one chooses. 

United States Steel, Common 

Book Value: Nominal, as figured from annual report for 1914, is in ex- 
cess of $100 a share. John Moody calculates book value at $77.21, starting 
with original assets, as computed from market values of the securities of the 
constituent companies (an erroneous basis in my opinion), and adding 
thereto merely the new construction and accumulated surplus. As figured 
by the Bureau of Corporations (prejudiced), $50 a share. 



198 MONEY MADE IN SECURITY INVESTMENTS 

Investment Value: Actual value in dissolution would depend on book 
worth of the properties being realized, and earnings of the new companies. 
I figure it at not less than $100. The stock is due to pay 5 per cent a year; 
and investors now demand 6% to 7 per cent from industrial common shares. 
Assuming permanence of the 5 per cent dividend, United States Steel must 
be considered safe for investment (and has always been, theoretically and 
practically) when income yield is between 7 and 8 per cent, or, in other 
words, when the stock is selling between 60 and 65. At 50, in 1913, income 
yield was 10 per cent and the stock was a wonderful purchase. 

Speculative Possibilities: Steel's range in price, while paying 5 per 
cent, was from $50 to $94% a share. Steel is a universal favorite in 
speculation. It is extensively bought and sold. Its major swings in price 
are not less than $30 to $40 a share. Intermediate manipulative swings $7 
to $11 a share. The stock can never be really cornered; there is too much of 
it; hence, it is a favorite short sale with the professionals, on proper occa- 
sions. Its history to date shows that it has always been a short sale, above 
80, even if it went higher afterward; and a purchase at 65, even if it went 
lower afterward. It is to be noted, that many of the leading stockholders in 
United States Steel speculate heavily in its shares, a circumstance which 
ensures an active market and big swings in price. 

Financial Backing: The most powerful and influential in the United 
States, including J. P. Morgan & Co., giving great stability to the corpora- 
tion. Interlocking interests of controlling spirits ensure a volume of busi- 
ness which could not otherwise be commanded. 

Management: The highest in technical skill and energy and thoroughly 
constructive. Witness, the great expansion of sales abroad; the ability with 
which prices are kept low enough to avoid creating fresh competition; the 
vast assets now behind the common stock ; etc. 

Tariff Laws: Duties are yet moderately protective, although lower than 
formerly. Should protection be eliminated from the laws, profits would 
suffer unless wages were reduced. With its enormous and scientifically 
equipped plants, United States Steel is in a better position to withstand 
foreign competition than most of its rivals. 

Earnings: Ordinarily far in excess of the 5 per cent dividend, even after 
deducting from $18,000,000 to $47,000,000 a year for depreciation and new 
construction. In the March quarter of 1915, net profits were $5,389,861 less 
than required, even after omitting the common dividend. The deficit has now 
been made up by increased volume of business and higher prices for finished 
products. Earnings in 1915, estimated at 10 per cent. 

Union Pacific, Common 

Book Value : Nominal, as per annual report of 1915, $160 a share. 

Investment Value: Actual value is rated by competent bankers as be- 
tween $225 and $250 a share, owing to the high market rating of ' ' securities 
owned" and various "hidden assets." As an 8 per cent stock, Union 
Pacific is always a good investment at $120 a share or less and is too high 
to keep at $170 a share or more. 

Speculative Possibilities: Union Pacific's range in price since being 
placed on an 8 per cent dividend basis has been from 112 to 141 y 2 . A lively 
campaign is always in progress in this stock. The pools have always tried 
for between 40 and 60 point swings in the price. Intermediate movements, 
22 to 30 points. For legitimate speculation, Union Pacific is always a pur- 
chase, in ordinary times, at 120 or lower, and a short sale at or above 160. 
In great bull campaigns and panics, those limits will be exceeded. Insiders 



WHEN TO BUY 



199 



in Union Pacific are active speculators in the common stock, a fact which 
accounts for its activity in the market and wide swings in price. 

Financial Backing: Union Pacific commands the support of several of 
the greatest bankers and bond houses, both in this country and abroad, par- 
ticularly that of Kuhn, Loeb & Co. 

Management: Of the highest quality in every respect, financially and 
otherwise. No elaboration of this point is necessary. 

Tariff Laws : A revenue tariff would enable the company to purchase its 
supplies somewhat cheaper. 

Other Laws: The whole body of railroad legislation is in the direction 
of restricting freedom of action, with reference to rates, capital issues, etc., 
and an increase of the burdens of taxation. An investor needs to keep an 
eye on this matter. 

Earnings: These have usually been equal to 16 or 19 per cent on the 
stock. Now, around 10 per cent. ' ' Other income ' ; of this company gives 
Union Pacific a unique position ; this ' ' other income ' ' formerly met interest 
on the funded debt and the preferred dividends, leaving the whole of the 
' ' income from operation ' ' entirely for the common stock and improvements. 
It is nearly equal to this now. Competition, emanating from the Panama 
Canal, is slightly detrimental to net profits of Union Pacific, but does not 
yet menace the 8 per cent dividend. 



FIVE YEAR AVEEAGE PLAN 

To clear away one misconception, at the start, allusion may be 
made to the doctrine, entertained by some and a favorite abroad, 
that a stock is to be bought when it has fallen to, or below, its aver- 
age price for the last five years. If that plan had been followed in 
1905, one might have tried to buy some one or more of the then 
excellent stocks, named below, at the prices set opposite : 



Amer. Car & Foundry, pfd 
Amer. Locomotive, pfd 
American Sugar 
Atchison 

Baltimore & Ohio . 
Canadian Pacific . . 
Chicago, Mil. & St. Paul 
* Chicago & North weste 
Delaware & Hudson 
General Electric 
Great Northern 
Illinois Central 



$78 Louisville & Nashville 

88 Manhattan Elevated 

127 *Mo. Pacific . . . 

67 *N. Y. Central . . 

90 *N. Y., N. H. & H. . 

114 *Pennsylvania 

157 ^People's Gas . . . 

193 Southern Pacific . . 

154 Union Pacific. 

198 U. S. Rubber, pfd. . 

188 U. S. Steel, pfd. . . 

139 Western Union . . 



$108 
131 
102 
142 
211 

70% 
102 

52% 

97 

65% 

79 

88 



Only six of the stocks named, those marked with an asterisk, fell 
as low in 1905 as the prices given and very few of the others came 
anywhere near the buying figures. Indeed, few others fell in 1905 
to their five year average. Obviously, this method of judging when 
to buy would have had little value in 1905. 



200 MONEY MADE IN SECUBITY INVESTMENTS 



Conversely, what would have been the result of following the five 
year average principle in 1914, making use of the same list? 







5 year 


High and low 


High and low 




average 


in 1914 


in 1915 


*Amer. Car & Foundry, pfd. . $118 


$112 


$118% 


$111% 


$118 


Amer. Locomotive, pfd. 


. 106 


96 


102% 


75 


105 


*American Sugar . 


. 119 


97 


109% 


109 


119% 


*Atchison .... 


. 106 


89% 
67 


100% 


92% 
63% 


111% 
96 


Baltimore & Ohio 


. 106 


98% 


Canadian Pacific 


. 216 


153 


220% 


138 


194 


Chicago, Mil. & St. Paul 


. 125 


86 


107% 


77% 


101% 


Chicago & Northwestern 


. 152 


122 


136% 


118% 


135% 


Delaware & Hudson . 


. . 168% 


138 % 


159% 


138% 


154% 


* General Electric . 


. . 159 


137% 


150% 


138 


185% 


Great Northern . 


. 134 


111% 


134% 


112% 


128 % 


Illinois Central 


. 134 


103% 


115 


99 


113 


Louisville & Nashville 


. 145 


125 


141% 


104% 


130% 


Manhattan Elevated 


. 136 


128 


133 


125 


132 


Mo. Pacific 


. 50 


7 


30 


1% 


18% 


N. Y. Central . . 




. . 114% 


77 


96% 


81% 


110% 


N. Y., N. H. & H. 




. 138% 


49% 


78 


43 


89 


Pennsylvania . 




. 63 


51% 


573,4 


51% 


61% 


*People's Gas . 




. Ill 


106 


125 


106% 


123% 


Southern Pacific . 




. . 123 


81 


99% 


81% 


104% 


Union Pacific 




. 172 


112 


1643/ 8 


115% 


141% 


*U. S. Eubber, 1st pfd 




. 108% 


95% 


104% 


101% 


110 


U. S. Steel, pfd. . 




. . 123% 


103% 


112% 


102 


117 


*Western Union . x 




. 72% 


53% 


66% 


57 


90 



The tabulation speaks for itself. All of these shares fell below 
the five year average in 1914 and 1915. Some of them will remain 
below for years. From only 7 of the 24, designated with an asterisk, 
could the investor have reclaimed his capital intact in 1915. 

The plan of buying, with reference to a five year average price, 
utterly ignores the theory of Cycles. It would have answered dur- 
ing certain periods after the Civil War and in the J 80s and '90s. 
In 1903 and 1904, the plan might have been good enough, because 
there had been heavy depression with heavy drives at prices; but, 
in those years, other potent considerations would have dictated the 
purchase of securities for investment and speculation, and these 
considerations would have been convincing and sufficient. On the 
whole, the five year average can be so little depended upon that its 
practical value as a guide is almost nil. 

In other lands, and in periods, in which conditions are stationary, 
the five year average plan may answer in a given year. Some other 



WHEN TO BUY 201 

guide must be sought in a region like the United States, where 
conditions are never stationary and where powerful underlying 
forces operate to bring about serious alternations in the market 
value of securities. 

There is one contingency in which the doctrine of average price 
may be acted upon. When a stock, or group of stocks, has risen 
rapidly from a previous low level, it is apt to react nearly or quite 
half-way back before resuming its upward swing. The phenomenon 
is seen more distinctly in the speculative and highly manipulated 
shares. Stock exchange records contain thousands of illustrations. 

Eeactions half way back are visible in some of the charts of stock 
values in this book. An investor who has become convinced that a 
long reign of prosperity in trade, manufacturing and transporta- 
tion is denoted by basic factors, and that the bull market in securi- 
ties will persevere for many months or a year, can usually buy his 
favorite stocks, with entire safety, on these half way back reactions, 
if he missed his opportunity at the bottom. 

EVIDENCE OF THE TIME TO BUY 

The time to buy is always to be judged by the volume of evidence 
on hand, which points to the approaching end of a substantial de- 
cline and a coming advance of securities in price. There seldom 
can be exact mathematical demonstration that the exact bottom of 
prices has come. Satisfactory evidence is, however, not difficult to 
obtain. To quote from Greenleaf : "The circumstances which will 
amount to this degree of proof can never be previously defined. The 
only legal test, of which they are susceptible, is their sufficiency to 
satisfy the mind and conscience of a common man; and so to con- 
vince him, that he would venture to act upon that conviction, in 
matters of the highest concern and importance to his interest." It 
is not difficult to assemble the evidence, which will indicate that the 
time has come to buy, so as to reach a sufficiently accurate con- 
clusion. 

The best guides are a knowledge of the trend of underlying con- 
ditions and the phase of the current Cycle, through which the coun- 
try is passing; common sense; a clear understanding of the high, 
and low levels, at which favorite stocks have sold in previous years, 



202 MONEY MADE IN SECURITY INVESTMENTS 

and of the financial status of the corporations, which they repre- 
sent ; and lastly, the action of the stock market itself, as exhibited 
by a chart of high and low prices by da}^s or weeks. 

Assume, first, that a period of depression has prevailed for six 
months or a year, and that the country is entering upon the first or 
the third quarter of a Cycle. There may have been a panic and 
terrifying slaughter of values. Can an opinion be gathered from 
responsible sources of information, that compulsory liquidation of 
speculative accounts in the stock market has practically been con- 
cluded ? Does the stock market fall dull on reactions, showing that 
there is no more stock for sale ? Does fresh bad news fail to bring 
on another smash in prices? Are bank reserves on the mend? Is 
there a promise that interest rates will soon fall to normal, or are 
loans actually being made to merchants at 3 to 3y 2 per cent, the 
figure which customarily marks a plethora of money in the banks ? 
Is the income yield of tried and seasoned stocks much greater than 
their dividends ? Is sentiment hopeful in the iron and steel trade ? 
Do railroad earnings keep up, or, if they have fallen off, is there 
promise of an early resumption of traffic ? Has there been a large 
planting of grain and cotton and is the weather favorable to the 
crops ? In a year, when these questions can be answered in the af- 
firmative, the time to buy is during a strong drive at prices with 
heavy trading at the stock exchanges, some time in the months from 
July to October. In every year of depression since 1860, bottom 
has been reached some time between July and October. Stocks may 
have seemed amazingly cheap in the Spring of those years, all 
things considered, but experience shows that they have always been 
cheaper yet in the Fall. No iron-clad rule can be laid down, as to 
whether it is preferable to buy in July or the Fall in these years of 
prostration. No investor can dispense with the exercise of judg- 
ment in every action on the subject of stocks. But if he keeps his 
eyes on the banking situation, he cannot go far astray in deciding 
whether to buy in July or at some later date. It may be said, how- 
ever, that purchases as early as July in a year of desperate depres- 
sion, after one or two years of the downward swing, are generally 
safe enough for all practical purposes. An investor and long pull 
operator is then merely reinstating his holdings of sound securities, 



WHEN TO BUY 203 

previously sold at much higher prices; and if they go somewhat 
lower in the Fall, no harm can come to him, provided that the trend 
of the times is toward betterment. 

But suppose that an investor did not recover his stocks at or near 
the bottom of prices in a year of great depression! Suppose that 
the bull movement has made some progress upward, when he comes 
into the money which he wants to invest, and that prices are higher 
than they were ! What then ? If conditions remain good, if money 
is easy,* the banks have ample resources, times continue to brighten, 
and prosperity looms large for months or years ahead, then the best 
time to buy is at the bottom of the normal yearly swings in prices. 
June or July, after a considerable drop in prices, or later in Sep- 
tember or October, is the time to buy. 

July and January are the two months in each year when dividend 
and interest disbursements are at their maximum, amounting now 
to around $250,000,000 in each of those two months. The "Janu- 
ary investment demand" for securities is a tradition of Wall Street. 
Probably more ready money is available for the purchase of securi- 
ties, and it is understood that more money goes into stocks and 
bonds in July and January than in any other months of the year. 
January is the favorite investment month. It cannot, however, be 
too strongly impressed upon the mind, that January is precisely the 
worst month of the year for these purchases, unless at that time the 
country is entering upon the first or third stage of a Cycle. July is 
usually the better month. 

In a general way, a good rule in years of reaction is to buy when 
things look absolutely the worst, when men who hang all day over 
a stock ticker feel sure that some catastrophe is impending, they 
know not what, and that prices are going lower yet. The inexperi- 
enced part of the public always sells at such a time as that ; and an 
investor and long pull operator can accumulate all the stocks he 
wants without bidding up the price in doing so. A man must have 
some confidence in the future of his country and its inexhaustible 
spirit of enterprise and its resources. 

A panic in an improving year always brings a bargain da} r , sooner 
or later. If one is not quick enough to buy on the day of the great 
smash, he can commonly do so to advantage a few days later, be- 



204 MONEY MADE IN SECURITY INVESTMENTS 

cause, while there is invariably an excited rally immediately after a 
panic, a second decline nearly if not quite to the low level reached 
before has always heretofore taken place. On a great break, stocks 
are always bought in quantity by prominent financial interests to 
support the market and prevent it from going to pieces entirely; 
and when order has been measurably restored, these stocks are sold, 
and during the selling there is another recession. 

During a great boom in business and stocks, millions of money 
accrue to the public not only in the form of dividends, interest and 
profits from private ventures of all kinds, but from the very rise of 
the stock market itself. Activity in trade, good crops and success- 
ful business and professional enterprise result in an unending 
stream of surplus profits to a legion of men and women. As a mat- 
ter of fact,, the amount of money, which becomes available for in- 
vestment swells, year by year, month by month, while the good times 
prevail, and iS at its maximum just as the good times are about to 
end. This is a circumstance which enters into the plans of market 
manipulators and professional operators, and explains why they 
strive to move the whole body of good securities upward, and ever 
upward, as long as the public is making money. What must the 
investor do with his surplus money at such a time ? He is exactly 
the man, for whom, in the parlance of the Street, the pools and 
operators are "gunning." The air will be found full of reasons why 
he should not delay but should invest at once. Those who have 
stocks to sell want his money ; and they will put forth every effort to 
induce the generality to buy at high prices. This is the most dan- 
gerous and difficult time for an investor. He must ask himself: 
Are stocks selling above investment worth? Has the boom been in 
progress several years? Have money supplies been diminished by 
the activity of business and by stock market operations, until loans 
are more than deposits, or until surplus deposits are nearly at zero ? 
Are interest rates high? What is the state of foreign trade? In 
what quarter of the 10-11 year Cycle are we? Does disturbing 
legislation threaten ? Have there been exposures of fraud or wrong- 
doing ? On a calm and dispassionate review of these, and all other, 
elements of the financial situation, are there present a majority of 
the circumstances which always forerun a crisis and a reaction in 



WHEN TO BUY 205 

trade ? To all appearances, the sky may be clear, no clouds or dis- 
tant nmtterings may indicate an approaching storm, every favorable 
factor may be treated lightly by the press (which, from principle, 
not at all from mercenary considerations, prefers never to alarm the 
investing public), unbounded enthusiasm may prevail among ac- 
quaintances, and rumors may abound of yet higher prices for stocks. 
This is precisely the time not to buy. In a few* instances, stocks 
may rise higher. An investor may feel, for the moment, that he has 
lost an opportunity in some of them. He will do well, however, to 
deposit his surplus money in a good bank and leave it there, and to 
wait with a perfectly calm mind for the rising tide to halt and then 
to ebb furiously in the manner characteristic of periods of crisis 
and reaction. He will buy only when the reaction has run its course, 
as nearly as can be judged. 

It is seldom worth while to buy an active stock immediately after 
a dividend has been increased. The temptation to go in at once is 
almost irresistible, especially if the stock at once starts upward. 
One may rely upon it, that the insiders and their friends have had 
advance information of the good thing coming and have been buy- 
ing the stock when it was low, in order to sell out later. Good news, 
such as this, is certain to be followed by at least a moderate reaction. 
That is the time to buy. 

Those who have ample funds, a portion of which they are willing 
to risk in the purchase of non-dividend-paying stocks, often devote 
some attention to bankrupt companies, which are about to be re- 
organized. A great deal of money has been made in such stocks. 
One needs only to compare the present value of Atchison, Baltimore 
& Ohio, Northern Pacific, Beading, Erie, and Union Pacific, to 
realize the profits which have been made by courageous buyers, who 
accumulated those securities when they could be had for a song. No 
doubt, years of waiting followed, but sterling companies were sure 
to shake themselves free from their difficulties in time. In the 
rearrangement cf the finances of a bankrupt company, it is not un- 
common to levy an assessment of $1 to $50 a share, on the stock. 
An investor will wait until the plan of reorganization is published. 
He will then know exactly what he has to face. Many holders will 
sell rather than pay the assessment ; and it seldom fails to come to 



206 MONEY MADE IN" SECUEITY INVESTMENTS 

pass, that a buyer can secure the stock at as low a price as before 
and sometimes lower. There will be little harm in waiting until one 
can buy a stock, on which all the assessments have been paid. 

A CODE OF KULES 

To summarize the whole matter and codify the rules for buying as 
far as practicable : 

1.— In years of panic, trade depression and reactions, buy only in the late 
Summer or Fall, on some strong drive at prices, and when income yield from 
a stock is larger than the dividend ! 

2.— In years of improving business, if the market has not risen for more 
than one year, buy on strong reactions in the Summer or Fall months, and 
especially if the market has been so dull for several days or weeks as to 
excite comment in the newspapers! 

3.— In a good year, buy during a panic caused by some transient develop- 
ment which does not alter the broad trend of conditions, or on the second 
drop of prices, after recovery has begun ! 

4.— After a dividend has been raised, buy after the next strong reaction! 

5.— After a stock has long been inactive and when the price is low, buy 
when transactions become large and the price begins to rise! 

6.— Do not buy after a long or sudden rise, especially if the price has 
risen above investment value, that is to say, if income yield is now less than 
the dividend! 

7.— If a stock is not above investment value, buy, after a sudden rise, 
when the stock has reacted half way back ! 

8.— Do not buy a stock, whose earnings have been barely able to meet fixed 
charges and dividends, if an intention is made manifest to expand the capi- 
tal or bonded debt considerably! 

9.— Buy the stock of a company about to be reorganized only after the 
plan of reorganization has been made known! 

10.— Never buy in January, except in those years which begin the first or 
third quarter of a 10-11 year Cycle ! 

11.— Buy when, after a trading market lasting several weeks, the tide of 
prices begins to rise and breaks above the trading range! 

12.— After you have bought, do not sell out on the first smart rally! 
Wait until it is written that the time has actually come to sell ! 



XVI 
WHEN TO SELL 

CULMINATION AT TOP OF THE MARKET NOT SO DEFINITE AS AT THE BOTTOM.— 
BOOMS AND THEIR ENDING. — STOP ORDERS.— A FEW NOTEWORTHY INSTANCES 
OF THE TIMES TO SELL 

IN Wall Street, among the men who trade actively in stocks, in 
order to catch the 3 to 5 point turns in prices, from week to week, 
it is not uncommon to find individuals, who have a genius for buy- 
ing at the exact psychological moment, but who tend to overstay the 
rise and frequently let the profits of to-day run into losses to-mor- 
row. There are others, whose insight as to the proper time to sell is 
marvelous, but who lack the faculty of buying at the right juncture. 
It is possible to train the mind so as to act with reasonable discre- 
tion in both cases. 

With reference to profit taking, a general rule, which has stood 
the test of time, is to let go of stocks, when they are above invest- 
ment worth ; when there is excited buying by the general public or 
by traders who are short of stocks ; when the volume of transactions 
is unusually large ; and when these periods coincide approximately 
with the logical culmination of a normal yearly movement in prices, 
especially if the rise has been in progress for several years. The rule 
seems simplicity itself. In practice, it is difficult to follow, owing, 
to speak plainly, to the credulity and cupidity of human nature. 

It is presumed that an investor has bought good stocks during a 
period of depression or reaction, and that, by patient waiting 
through good and evil days, he has seen $15, $25, or $50 added to 
the value of each share he holds, and that he has meanwhile re- 
ceived one or more dividends on the stocks. Trading at the stock 
exchange may be fast and furious. Enthusiasm may prevail on 
every side. Sales may have mounted to an aggregate of one or two 
million shares a day. The time may be at hand for the top of a 
normal yearly swing in stocks. At this juncture, an investor will 

207 



208 MONEY MADE IN SECUKITY INVESTMENTS 

free his mind entirely from the tips and rumors of Wall Street and 
consider, in the most matter-of-fact way, how much higher, if any, 
the market is likely to go. 

It is important to watch for the phenomena which attend the top 
of a bull movement. In its origin, a bull market is as much the 
product of natural forces, as are the plants, the leaves and flowers, 
which cover the face of nature in the Spring; and the growth of 
prices resembles the slow progress of the crops, in that the move- 
ment is exposed to accidents and must be carefully aided by the art 
of man. But there is a vast difference in the circumstances which 
attend the harvest. On the farms and plantations, the husbandman 
can sedately pluck the fruits, reap the ripened grain, and harvest 
the sugar cane and cotton, with full knowledge that the time has 
come and that delay will ensure the blighting of all his hopes by the 
inevitable and bitter frosts of Winter. The signs that the harvest 
time has arrived are not so obvious at the end of a bull movement in 
stocks. They neve,r are as clear at the top as at the bottom of the 
market. 

The continuous parabolic curve, described by a sky rocket at the 
top of its flight, is much more regular and orderly than the proceed- 
ings, which take place at the top of either a great bull market or a 
25 point trading turn in stocks. It is not difficult to judge, closely, 
when a sky rocket will turn for its graceful earthward descent, be- 
cause its speed slackens slowly and mechanically until, just before 
the turn, all headway is lost. On the other hand, the last part of a 
great stock market advance is commonly the most swift and violent 
of the whole movement ; and thereafter, there always ensues a series 
of wild and eccentric gambols in prices, 5 to 10 point reactions and 
rallies, lasting in all from one to four months, until the judgment 
of the spectator is confused and beclouded. 

The time to sell, to harvest one's profits, and to retire from se- 
curities until another buying opportunity presents itself, is of 
course when an important advance in prices is about to culminate ; 
and the present chapter aims to deal with the broad considerations, 
concerning this branch of the general subject. Fortunately, signs 
of approaching culmination of such gigantic and protracted up- 
heavals in the stock market as occurred in 1864, 1881, 1890, 1901, 




WHEN TO SELL 209 



1902, 1906 and 1909 are never lacking. There is also a basis for 
judgment, even with reference to the less conspicuous upward 
swings in prices. 

Apropos of the time to sell, Rothschild's maxim is full of wisdom 
for investors and long pull speculators and is worth repeating. 
Having finally accumulated an enormous fortune, that brilliant 
financier declared that he had gained it by "never buying at the 
bottom and never selling at the top." He knew when conditions 
promised, broadly, a future rise or decline, and that was enough for 
him. It ought to be enough for anybody. After a long rise, Mr. 
Rothschild, having gained a handsome addition to his fortune, be- 
gan to look for clouds on the distant horizon, and when they ap- 
peared and the barometer began to fall, he made haste to "sell his 
first" before other people were alarmed. He was always safe and 
never failed to promote the fortunes of himself and his house. 

This is also the principle followed by the numerous profitable in- 
vestment companies in Holland, whose dividends are so fat. Among 
these concerns, American securities are a favorite (they fluctuate 
so widely). The Dutch are absolutely dispassionate, cool in tem- 
perament, and level headed as to their purchases and sales. They 
never try for the last dollar of profits ; they make it their business to 
get out in time. 

However, every American wishes to gain as large a part as pos- 
sible of every important advance, and not to sell until it is really com- 
pulsory to do so, all things considered. It is therefore convenient 
to know under what circumstances it becomes imperative to sell. 

In a general way, the considerations which govern the time to 
sell are exactly the reverse of those which indicate the propriety of 
buying, but there are certain other elements of the matter, which 
make a detailed review of the subject proper. Warnings as to the 
necessity of liquidation are to be expected from : 

1. Income yield of stocks. 

2. Volume of transactions at the big Exchange in New York. 

3. Action of the market itself. 

4. Banking conditions and money rates. 

5. Other conditions. 



.210 MONEY MADE IN SECURITY INVESTMENTS 

These five considerations supply a scientific basis and sufficient 
evidence as to the propriety of liquidation of investment and specu- 
lative accounts, in ample time to conserve both capital and profits. 
Some of them are as definite in their indications of the coming 
of trouble, as the ancient beacon fires on the New England hills 
were of the stealthy approach of the Indians. 

While the owner of securities must always be attentive, he need 
not be in undue haste. He must consider first of all the stage of the 
Cycle through which the country is passing and the probability of 
the stately upward movement lasting for years, as it did after 1861, 
1865, 1877, 1884, 1894 and 1907. He should decide how much is 
left of the one to three years rise. He must also determine 
whether to wait for the end of the major swing in prices in the first 
and third quarters of a Cycle or to take advantage of the normal 
yearly turn. It is safer, as a rule, to take the latter course, because 
an investor will then remain a closer student of conditions, and he 
will be safer against accidents, war scares, crop shortages, the death 
of prominent magnates in the financial world and unexpected ex- 
posures of rascality and failure of institutions. Impending crop 
failure is a tremendously bearish argument, as witness the serious 
reaction in the Summer of 1901 in consequence of the partial 
destruction of corn by parching winds and hot weather. Witness 
also the way that small crops added to the depressing influences of 
1903 and 1911. On the other hand, great crops, like those of 1905, 
1906, 1909 and 1912, add value to securities and inspire a rise in 
market prices. Size of the crops is merely an annual influence. 
Good crops are discounted by a Fall rise, and poor ones by a mid- 
Summer reaction. Prospective changes in the tariff laws are worth 
attention. 

It is a task of exceptional difficulty for the private individual to 
judge when to get out of a particular stock from the point of view 
of earnings and dividends alone. Insiders are apprised of the trend 
of earnings, of the difficulties and competition which confront them, 
and the rocks ahead, long before the public are notified of the facts. 
They may maintain the dividend, for a speculative purpose, but 
insiders begin to sell long ahead of the crowd. A mysterious and 
protracted decline against the course of the general market, such as 



WHEN TO SELL 211 

befell Amalgamated Copper in 1901, or Texas Company in the early 
part of 1910, or a failure to rise proportionately with other stocks 
in a bull market, is a sign of weakness in earnings or other financial 
difficulties, but it is seldom that outsiders know the facts in time to 
sell to advantage. Unaccountable heaviness in the price of a par- 
ticular stock demands instant attention, however, and usually sale, 
even at some loss, before it is too late. 

Chart indications are of the utmost importance. See "Trading 
Markets." 

Bad banking conditions can never be corrected normally, except 
by the calling upon speculators and others to return to the banks 
the money, which they have borrowed and for which they have 
pledged their stocks as collateral security. Unless the money can 
be borrowed from other institutions, in town or out, or in Europe, 
the securities must be sold forthwith, to obtain the cash for repay- 
ment of the loans. Compulsory liquidation of speculative accounts, 
owing to the calling of loans, puts a sharp, effective and sudden end 
to a bull campaign. This is what was the matter in 1902, 1906 and 
finally in 1909, and will always be the matter when bank resources 
are seriously strained. When banking conditions are bad, the time 
has come to sell securities. 

Eange of prices for several years preceding will often supply a 
clue to the time to sell. When far above its normal range of prices, 
it is usually better to throw a stock on the market. 

Culminations are often denoted by the fact that rallies do not 
hold. When this symptom appears, the market is technically weak. 

Bullishness at fever heat, a state of mind for which the manipu- 
lative element have steadfastly labored for purposes of their own, is 
another token of the time to sell. Too much good news is always 
acted upon for sales by many wise old timers, who have made a lot 
of money in the stock market. 

A cool-headed investor will reason over the whole matter with 
entire sang froid. Suppose that Union Pacific had been bought in 
1904 around $75. In November of the same year, the stock had 
risen to $117, close to the highest price on record. An advance of 
$42 a share must have proved, and to many did prove, a strong 
temptation to sell. But the company had paid 4 per cent for years ; 



212 MONEY MADE IN SECURITY INVESTMENTS 

and its earnings had grown finally to around 10 per cent in excess 
of fixed charges, as appeared from its financial reports. It was as 
certain as anything could humanly be, that the moderate rate of 4 
per cent would in time give place to a larger annual distribution on 
the stock. The times were mending. No signs of trouble were visible 
in the financial outlook. Surplus deposits were large and money in 
ample supply. The usual January or Spring rise was just ahead; 
and it could have safely been taken for granted that nothing would 
be lost by waiting until that time. In February, 1905, there was 
a week of excited trading at the New York Stock Exchange, with 
total sales of almost 2,000,000 shares a day. During that swirl up- 
ward, Union Pacific was rushed to $138 a share. At that price an 
investor would get less than 3 per cent on his investment. That was 
the time to sell. A few months later one could have repurchased 
$20 a share lower. 

After Union Pacific's dividend was raised to 10 per cent, the 
shares sold as high as $219 in 1909, then yielding only 4.55 per 
cent on the investment. Two hundred and nineteen was the 
highest quotation on record. Conditions of that time were so plainly 
an imperative order to sell, that no one need have been in the 
slightest doubt as to what to do with his holdings of this fine old 
stock. 

Another instance. Suppose that an investor had bought United 
States Steel, preferred, early in 1904, around $55, having become 
convinced that the corporation was able, and resolved, to maintain 
the 7 per cent dividend. By October the stock had risen nearly to 
$85. A quarterly report is issued by the Steel officials, and from 
this it could have been learned that profits were steadily expanding 
and that the trade had entered upon a period of genuine prosperity. 
The facts would have justified the belief that Steel, preferred, would 
ultimately rise to par or higher. A sound industrial, tried by the 
storms of depression and reaction and paying 7 per cent regularly, 
should be worth from $100 to $120 and upward. Until the security 
in question should have approached the higher figures, then, no 
important reason would have appeared for selling. Had an investor 
sold during the excited market of February, 1905, he could have 
realized around $96 for his stock and would have added the hand- 



WHEN TO SELL 213 

some sum of over $40 a share to his principal. He might have 
bought again, next month, a few dollars a share cheaper; but the 
prospect of this was small; and the investor might have safely 
waited for the quotation which the stock seemed destined to reach 
at a not distant date. At the top of the Spring rise in 1905 it went 
nearly to $105. This figure coincided with the culmination of a 
normal yearly swing; and that was the time to sell. Steel, pre- 
ferred, reacted nearly to $90 during the dull Summer months of 
1905 and has since been sold at $125%. 

The 1909 episode in United States Steel, common, supplied evi- 
dence of the time to sell. The corporation's "open war in the steel 
trade" in February, 1909, led Pittsburgh, Chicago and London to go 
heavily short of the Steel shares. Unexpectedly to the bear operators, 
the lower prices for iron and steel products led to a great expansion 
of the business ; and against the short interest, United States Steel, 
common, was forced from 41% in February to 94% in October. 
The dividend was then 3 per cent ; and while a larger disbursement 
was in prospect, the stock was certainly too high to hold at 94%. 
Thousands of holders hastened very properly to get out and United 
States Steel, common, could have been bought, next year, as low 
as 61%. 

A typical instance of the proper time to sell was supplied by St. 
Paul in 1902. Purchases could have been made around $150 sev- 
eral times in the first three months of 1901 ; and on one occasion it 
sold as high as $186. As a 6 per cent investment stock, at $186, 
St. Paul would have yielded about 3% per cent on the purchase 
price. Scores of investors sold their holdings then and repurchased, 
the same year, $30 a share lower. By September, 1902, St. Paul 
had been bulled to $1983/4. It had been "tipped" for $200 and 
came near enough to that figure for all practical purposes. The 
market then hesitated. The stock was about to be placed on a 7 per 
cent basis; but around $200, the stock would have paid only 3% 
per cent on the purchase price. At the critical moment, in order to 
support the stock and enable the pool to market its later purchases 
without a loss, Wall Street was filled with rumors that St. Paul was 
going to $220. A few rash speculators may have bought at the 
prices then ruling; but at $220 St. Paul would have paid less than 



214 MONEY MADE IN SECURITY INVESTMENTS 

314 per cent. Money was worth more than that then. Surplus 
deposits of the New York banks were almost exhausted. Interest 
rates were high. Every underlying condition presaged a coming 
crisis and reaction. Credit was badly strained. Buyers at Spring 
prices had more than $30 a share profit and this would have paid 
the 7 per cent dividend for four years. Conservative investors sold 
without more ado. St. Paul never went even to $200, much less 
$220 ; and it entered upon a fall which was never seriously inter- 
rupted until September, 1903, when the stock sold around $134 a 
share. Those who did not act promptly and get out in September, 
1902, had an opportunity to do so around $180 to $183 in the Janu- 
ary rise of 1903. 

It is always harder to decide when to sell than when to buy. At 
the height of a bull movement, current gossip tends to blunt the 
perceptions as to the foundations on which the market rests. The 
hysterics which prevail at the bottom of a bear market, or in a hotel 
fire, or when the steamer is in trouble at sea, are as hard to contend 
with as the contagious enthusiasm, the bull "tips," the cloud of 
higher dividends, and the rumors which fill the air, when a bull 
market is approaching culmination. Hotel lobbies, the clubs, the 
popular restaurants and the newspapers are full of tales, most of 
them grossly exaggerated, in which scores of people, including ac- 
tresses, head waiters, valets and clerks, are reported to have made 
fortunes in the stock market and to have gone in again on various 
stocks named. Cynicism is the best ally at such times. Many 
shrewd and successful private owners of securities make it an in- 
variable rule to get out of stocks, the moment a great rise in the 
market becomes a first page feature in the daily sheets. A careful 
man will disentangle himself bluntly from all outside influences; 
and if any of the stocks which he holds are in truth going higher, 
he will "let the other fellow" make the money and will sell him the 
stocks to do it with. He should leave the market, stay out entirely, 
and wait for the normal downward swing which is sure to follow. 
He can afford to devote himself to private affairs for a few months 
before committing himself again. 

A practice which will be found useful to many who cannot, or 
do not intend to, pay close attention to market vagaries, or who 



WHEN TO SELL 215 

expect to be absent, is the employment of so-called "stop-loss orders" 
— stop orders, for short. These are a protection against sudden 
panics and unexpected reactions. 

The theory of stop orders is based on a number of considerations, 
among them being the tendency, already referred to, of stocks to 
react half-way back after a strong rise or fall. No greater decline 
than half-way is likely ever to take place, unless a bull movement 
has definitely ended ; and conversely, no greater rally than that may 
be expected, unless the market has finally turned upward for good. 

An investor who makes use of a stop order would delay until 
there had been a good rise, say, $15 a share. To take a concrete 
instance, saj, from $80 to $95. He would then order his broker to 
"sell the stock at $88 stop." That is half-way back. As the rise 
goes on, he will raise the stop order, placing the point for a sale 
half-way back from highest quotations. All this will not prevent 
him from selling at any time, and any price, he chooses ; but it will 
ensure at least a part of his profits in case of a sudden panic like 
that of May, 1901, or any other severe reaction while he is away or 
inattentive. 

A useful fact to bear in mind is this, that, in bull markets, the 
highest prices of any given year are made either in January or 
April, on the one hand, or in the Fall. In a bear market, and dur- 
ing a trade reaction, they are made from July to October. 

A CODE OF RULES 

To summarize, a few rules will serve as an approximate guide as 
to the time to sell : 

1.— In anyevent, sell, after a powerful rise, and when all the news is good, 
but when every underlying condition of finance points to an approaching 
crisis and depression! 

2. — Sell, when the price is above investment value, on any sudden rise or 
at the top approximately of a normal yearly swing ! 

3.— Sell, in January or February, when surplus deposits have fallen near 
to or below zero, when interest rates are high, and when the slackening of 
trade can no longer be disguised! 

4.— Sell, as a normal yearly movement in prices reaches its usual period 
of culmination, if you expect to repurchase after a fair reaction! 

5. — Never sell a stock which has been carried through a long and sus- 
tained decline, when it is at absurdly low figures, unless there is something 
seriously wrong with its finances! 



216 MONEY MADE IN SECURITY INVESTMENTS 

6.— Never sell on news of a strike among the workmen of a corporation, 
unless the stock is above investment worth, and then you should sell anyhow ! 

7.— Never sell during a transient panic, in a bull market, except on a stop 
order, but hold on until the rally, and then judge dispassionately ! 

8. — Never sell a good stock on mere market rumors. They are too often 
set afloat to mislead ! 

9.— Do not be discontented if your stock does not bring the very highest 
price which has been paid for it! The highest prices seldom last for more 
than a few minutes and cannot be realized by a person away from Wall 
Street and by few in it. 

10.— When selling, after sound consideration, it is usually best to sell "at 
market price," without striving for some particular figure! In nine cases 
out of ten, the latter effort meets with disappointment. 

11.— Finally, do not go in again, after being once out! This is an old and 
sound rule. 



XVII 

A CORRECT SYSTEM IN INVESTMENT AND SPECULATION 

THE PROPER PLAN FOR AN INVESTOR AND LONG PULL TRADER. —KNOWLEDGE, 
JUDGMENT, A FIRM WILL, AND COMMON SENSE, THE PRINCIPAL GUIDES, BUT 
A CHART USEFUL AS AN AUXILIARY 

IT will be proper to terminate this discussion with a recapitulation 
and summing up, even at the risk of some repetition. 

A correct system for both the investor and for him who engages 
in legitimate long pull speculation must necessarily be based on an 
intimate knowledge of the painstaking and successful methods, fol- 
lowed by those who have attained a competence and by those others 
who have amassed fortune, through the agency of security invest- 
ments. A race of teachers of efficiency has arisen in these latter 
days, whose motto it is, that all the desirable things of life are 
within the reach of every man, who will adopt the proper rules for 
guidance and who will train his mind and will to follow those rules 
implicitly and to the end. In no department of activity are correct 
rules and the power of will to obey them more essential to success 
than in the matter of security investments. 

A system connotes methods of procedure, calculated to attain the 
object in view. Once adopted, a proper system must be followed 
courageously and to the limit. If the system has not been entirely 
perfected, if once in a while it fails to bring the utmost possible 
benefits, it should by no means be abandoned. It should be amended 
in the light of one's own experience. A careful review of the 
motives and considerations, which led to a specific purchase or sale, 
and the reasons why that action proved unsatisfactory, will tend to 
correct any slight fault in methods and lead to a perfection of one's 
system. The importance of adopting a definite plan of action will 
become manifest, as soon as one realizes that when the great buying 

217 






218 MONEY MADE IN SECURITY INVESTMENTS 

and selling opportunities arrive, every effort will be made by preda- 
tory interests to confuse the public mind, to blind the generality as 
to what is actually going on, and to cause individual investors and 
traders to distrust their own judgment. In such cases, there is no 
safety except adherence to a tried and tested system, which will 
protect a man against his own doubts and enable him to navigate 
safely through the fog which chokes and conceals the long view 
ahead. 

While human beings are divided with respect to security invest- 
ments into two classes, investors and long pull traders, yet the cor- 
rect procedure for each in its salient features is precisely the same. 
The trader, however, operates for profit only and customarily on a 
margin ; and he must take certain precautions, which the man who 
has paid for his securities in full may ignore. 

FOE HIM WHO BUYS BONDS ONLY 

For the capitalist who will have nothing except bonds, little can be 
set forth in the nature of a system, although suggestions may be 
useful. 

If the investor intends to hold all his bonds until maturity, or 
until some vague period in the future when they have risen in value 
above his purchase price, no other system is required for him, except 
that he should never buy a non-convertible bond, no matter how 
attractive is the prospectus, when it sells above par or yields an 
income smaller than its rate of interest. If he pays a premium for 
the bond, then his net income until maturity is cut down just so 
much. To conserve income and to ensure safety of capital, bonds 
should be bought only during or after a great Panic and before the 
market starts up, as in 1903, 1907, and 1915. The charts of course 
of the bond market on other pages of this book will indicate that 
fact, clearly, to the most heedless investor. Per contra, it is the les- 
son of experience, that ordinary bonds should be sold, whenever a 
rise in price affords to their owners the equivalent of from one to 
three years' interest. Safety of capital must be kept in view, 
peremptorily. 

Bonds, bought to gain an income better than the low rate of inter- 



A SYSTEM IN INVESTMENT AND SPECULATION 219 

est paid by a trust company, while the owner of capital is out of 
stocks, or when his regular business falls dull, seldom prove remu- 
nerative and have often proved extremely embarrassing. If the 
capital is required later, for business purposes, the bonds are gen- 
erally sold at a loss. 

It is also the lesson of experience, that bonds, bought when they 
are first issued and advertised, deteriorate in value afterward. Fi- 
nancial precedent is definite on this point. It may minister to a 
man's pleasure to enter a great banking or bond house, where he 
will be received with the most polite attention, and pay for a block 
of new bonds which are being floated at the time. New bonds are 
never sold at panic prices. They are never offered at the bottom 
range of their class. They are issued during a boom in stocks and 
at top market prices. They can invariably be bought, later, at a 
price equal to the saving of the interest for two or more years. The 
least of the dangers, to which the too enthusiastic investor in a new 
bond issue is exposed, is that his capital will be locketj up in bonds 
indefinitely, so that it cannot be released for any other and more 
remunerative employment. 

Convertible bonds of sound corporations are an excellent pur- 
chase in times of depression, because they are certain to advance in 
value later, thus making safe the capital invested. They should be 
sold, invariably, whenever a bull market in stocks becomes fast and 
furious, because they are doomed to decline soon afterward. 

The bonds of corporations, which are near the verge of bank- 
ruptcy, are often tempting from the point of view of price. In this 
case, the investor needs an exact knowledge of the true financial 
status and prospects of the corporation, and especially should he 
know without cavil the stage of the Cycle through which the coun- 
try is passing. If a Cycle is just beginning, and if a revival of 
trade and transportation promises escape from bankruptcy for the 
corporation, then these low priced and temporarily discredited 
bonds often prove satisfactory investments. 

State and other public bonds, which are exempt from income tax, 
are now a desirable investment, but should never be bought in a 
hurry or during a boom in stocks, for the same reasons which apply 
in the case of corporation issues. 



220 MONEY MADE IN SECURITY INVESTMENTS 

The bond business has been overdone; and the trend of invest- 
ment sentiment, both in this country and Europe, is now toward 
sound, old and seasoned common stocks, preferred stocks and short 
term notes. 



FOE THE INVESTOR IN STOCKS 

Stocks are more mercurial than bonds. Not one of even the 
soundest of them fails to have a considerable movement in price, 
every } r ear, in response to demand, supply and speculation, there 
being speculation in all of them. To protect his own interest, to 
safeguard the original capital invested in them, and certainly as a 
means of adding a desirable increment to fortune, it is absolutely 
essential that even the most conservative investor, the man who 
abhors speculation, must sell his holdings from time to time and 
repurchase them on proper occasions. It is quite practicable to set 
forth a correct system for transactions in stocks, condensed from 
the preceding pages of this book. 

1. A man who proposes to manage his own investments must 
positively be prepared to undergo whatever labor is involved in 
keeping himself informed as to fundamental conditions: the part 
of a Cycle, through which the country is passing; earnings and 
prospects of the corporation, in which he is interested; and above 
all other things, what money is going to be worth six months or a 
year ahead. If he is not competent, or is unwilling, to perform this 
labor, he would do well to turn his fortune over to a trust or secu- 
rity company, or be governed in his transactions by a competent 
financial adviser, and let harder working men manage affairs for 
him. The study of all the various factors which influence the value 
of securities is, however, most fascinating, and should prove a great 
pleasure to a healthy mind. Even if the study involves a little 
drudgery, it should be persisted in to such an extent, that the man 
who manages his own investments actually knows that his stocks 
and bonds are sound and well bought, and knows it so well, that if 
his investments are disputed, he can convince the other man. The 
investor may property consult financial authorities, but he will be 
in a more independent position if he can study the matter himself 



A SYSTEM IN INVESTMENT AND SPECULATION 221 

and make up his own mind. Knowledge is wealth and safety in 
security matters, and "from many a blunder it will free us, and 
foolish notion/ 7 The first principle is to understand conditions and 
their trend thoroughly. 

2. The next principle is to know when to buy. To this end, it is 
essential to look up the history of every stock and know its extreme 
range of price, in periods of low money and high money, and in 
booms and panics. How many investors govern themselves by an 
investigation of that character ? Not one in a thousand ! The ma- 
jority buy, at any price, on anybody's suggestion, or in response to 
a beautifully printed prospectus, issued by a banker, and without 
the slightest reference to where the general market stands, at the 
time, or the direction toward which the statues in the financial 
Alhambra point. That is about as unscientific a proceeding as can 
be imagined. A sound system for investment in securities of any 
kind provides that a man should buy, only when the securities have 
fallen in price approximately to or below the level, at which they 
have theretofore always been a speculative purchase for a substan- 
tial rise. Consult Chapter XV, on '"When to Buy." Naturally, 
this will often involve waiting for important reactions. But it is 
the plan followed by the great insiders and really successful in- 
vestors. It is the only way to safeguard the principal of an invest- 
ment. There were untold millions put into bonds and stocks in the 
fortunate years of 1905 and 1906, which will never come back to 
their possessors, simply because the securities were bought at the 
upper range of values, not at the lower, that upper range being at 
an extraordinarily high level, which has not since been seen and in 
some cases never will be seen again. When a man buys at the lower 
range of prices, his capital is safe and a pleasing profit will accrue 
thereon, in due time. 

It is admitted without the slightest diffidence, that if the whole 
investment world had acted upon the principle here set forth, and 
had refused to touch new issues of railroad bonds and stocks, until 
the prices of them had been slashed to a panic level, then thousands 
of miles of railroads in the United States and hundreds of factories 
would never have been built, when they were built. Settlement and 
civilization would never have advanced with such gigantic strides; 



222 MONEY MADE IN SECUEITY INVESTMENTS 

and the United States would be far more backward than it is to-day. 
This does not alter the fact one iota, that private investors have lost 
millions of money by their heedless purchase of security issues, at 
too high a price, and that the only way to safeguard private fortune, 
invested in securities, is to wait until securities have fallen ap- 
proximately to, or below, the low range in price, customary in panics 
or great reactions. The great insiders never buy the ordinary run 
of stocks, for investment, until they can do so on a 5 to 7 per cent 
income basis. This refers to stocks paying from 4 to 10 per cent. 

3. A correct system for an investor implies the sale of all his se- 
curities, when they approach the upper range of their normal price 
swings or rise above that range. In experience, this is the hardest 
duty for a conservative investor to discharge. Consult Chapter XVI, 
on "When to Sell," and the third paragraph of this chapter. The 
rush of prosperity, the enormous earnings of railroads and business 
corporations, the enthusiastic optimism which reigns on every hand, 
the larger dividends, and the arts of insiders who are anxious to sell 
out their speculative holdings to the public, blind the owners of 
securities at the top of a boom to the importance of getting out of 
everything they have, when they ought to do so. Yet financial his- 
tory is full of proofs of the assertion (and the years 1912 to 1914 
were particularly rich in examples), that no man can feel assured, 
when a valuable security begins to decline in price, that it will re- 
cover for many years afterward. Perhaps, it never will without an 
assessment on the stockholders. This argument alone, coupled with 
the misfortunes of the New York, New Haven & Hartford Eailroad, 
the Boston & Maine, Missouri Pacific, Wabash, and a large number 
of other railroads, which have in the past gone into bankruptcy or 
have been saved therefrom only through suspension of dividends 
and reduction of capitalizations, should be sufficient to enforce the 
lesson, that securities should be sold by even the most conservative 
investor in the height of a business boom. And certainly, the man 
who desires to add to his fortune by security transactions has no 
other recourse. The great insiders sell when stocks have risen so 
high, that income yield at going prices is from 3 to 4 per cent. 

4. The bulk of an investor's fortune should invariably be invested 
only in sound and seasoned securities, which are listed at one or 



A SYSTEM IN INVESTMENT AND SPECULATION 223 

more of the established exchanges, and in which dealings are more 
or less active. An inactive stock or bond can be sold only at a ma- 
terial concession in price. It can be bought only at a price consider- 
ably higher than the last quotations. It is important to have a 
ready market for securities which are to be sold. Active securities 
farthermore supply by their fluctuations a useful indication as to 
their true market value in alternating good and bad years. It is 
the extreme of imprudence for an investor to commit the bulk of 
his capital to new and untried securities. 

5. An investor with large interests in particular stocks will be 
supplied, automatically, with a valuable clue as to the great buying 
and selling opportunities, by keeping a chart of the daily price 
movements of his stocks, or by having an employe keep one for him. 
Keeping a chart does not transform him into a speculator. The 
trouble involved is small. On the other hand, a chart of high and 
low by days throws a constant light upon the trend of the market 
and aids immensely to detect the final turning point for the rise or 
fall. After a long and strong rise, when prices break below the 
trend, the investor must thereafter pay close attention to the mar- 
ket. When prices have risen finally to a new high and have broken 
under the trend for the third time, culmination of the rise is de- 
noted. Is it not worth while to have a compass, a system, to guide 
one at such a time, as a means of resolving one's doubts and as a 
valuable auxiliary to the judgment ? 

6. The investor hardly needs to hold any part of his capital in 
reserve, when the time has come to buy. In a panic period, or at 
the bottom of a great reaction, all securities do not necessarily 
reach their lowest prices on the same day. Some sound security 
may suddenly weaken, subsequently to actual culmination of the 
market in general, in consequence of belated liquidation of some 
large speculative marginal account, affording a tempting oppor- 
tunity for investors. But, as a rule, it is better to invest all the 
capital at once, and make the most of a great opportunity, even if 
a small opportunity should be lost. Nor is it sensible to put in part 
of the capital at the approximate bottom, and embark the rest only 
after a substantial recovery has set in. The money goes farther in 
making purchases, before there has been any recovery. 



224 MONEY MADE IN SECURITY INVESTMENTS 

7. When either buying or selling, go in boldly and have your 
broker execute your order "at market price." More opportunities 
are lost than are improved by haggling for a specific price. The big 
men never haggle over fractions of a dollar and seldom over whole 
dollars in the price. Eemember Kothschild's maxim that fortune is 
gained by never buying at the bottom or selling at the top. 

8. The most difficult and delicate question for an investor is what 
to do with funds, which become available when prices are part way 
up. Shall he invest at once or wait for a reaction? It is the 
opinion of the best authorities, that he should wait for a reaction, 
and that whatever he does, purchases made part way up from a 
previous low bottom should always be considered as a speculation 
and dealt with on that basis. They at any rate ought to be sold, on 
any farther rise and on the slightest appearance of doubt or trouble. 
It is the lesson of experience. 



The investor who follows these rules should make from 30 to 50 
per cent a year on his investments in securities. 

FOR THE LONG PULL TRADER 

Fundamentally, the trader, engaged in legitimate speculation, 
must know as much and be governed by precisely the same rules of 
action as the investor. Starting then with the same fund of gen- 
eral information as the investor and guided by the same principles 
in buying and selling, the trader needs to add to his rules for action 
merely those other things, which are imperative by reason of con- 
ducting his operations upon a margin. 

1. The trader should never, under any circumstances, place his 
whole capital at risk, on any margin too small to cover extreme pos- 
sibilities. If prices are at the usual low range, where investment 
begins, look back to the low price of your stock in the last previous 
panic, and estimate how much margin is required to make you per- 
fectly safe, and act accordingly ! No one should grumble at such a 
conservative piece of advice. A big margin at the start is of ines- 
timable value. It permits the trader to take on more stock, if the 



A SYSTEM IN INVESTMENT AND SPECULATION 225 

market has a farther dip, or after the long upward swing has begun. 
It is of the highest importance to start right and to be safe in the 
speculation. Some sudden change in affairs, some new develop- 
ment, may interrupt the broad upward or downward trend of the 
market long enough to prove a costly experience for the small- 
margin trader, an incident of no material importance to an in- 
vestor. Thus, large margins are essential. The higher the market 
has risen since the last panic or bottom, the larger the margin 
which will be safe. In these modern times, the proper margin on 
stocks worth around par is from $30 to $40 a share. Half the face 
value would be safer yet. On wild denominations, like the war 
stocks of 1915, anything less than from $50 to $75 margin would 
have cost the stubborn speculator all of the capital he had put at 
risk, unless he had bought at the actual bottom of prices. It is 
always well, in any case, for the trader to maintain a surplus of 
margin with the broker. This will enable him to take advantage of 
the occasional opportunity, presented by some other stock; and a 
position of entire safety with regard to margins ensures freedom 
from anxiety, and ability to form a dispassionate judgment. The 
man who tries to get rich slow, not quick, will get rich all the 
quicker. 

2. Wait until one's initial purchase can be made to distinct ad- 
vantage ! In the course of a series of years, this caution will pay 
handsomely. Then, use a really protective margin ! Natural forces 
and manipulation by big operators will do the rest. 

3. Since securities are being bought for the long pull, those 
which pay dividends are preeminently the best, because they pay 
carrying charges on the stocks. Interest on non-dividend payers 
mounts up so rapidly that it seldom pays to buy this class of stocks 
except for a comparatively quick turn. 

4. The trader should never place a stop order, on stocks scien- 
tifically and properly bought. He should use margins instead. To 
any man of experience, this suggestion will commend itself as en- 
tirely reasonable. Stop orders find their proper employment in 
protecting profits, not capital. Stop orders both on purchases and 
short sales are imperative, when a trading market hints at culmina- 
tion of a long move. 



226 MONEY MADE IN SECUEITY INVESTMENTS 

5. A few minor rules have been crystallized from the experience 
of years : 

Do not cast away discretion and judgment, after a few successful 
trades, and do not increase quantities then or operate on smaller 
margins ! Restrict, rather than expand, operations ! 

Having had sound reasons for selling, after a long rise, the only 
logical course is to reverse one's position on the market and sell 
short. The same rule applies to covering short stock after a long 
decline. Do not sell short again, but reverse your position ! 

Never act upon a tip ! Insiders distribute tips for their own ad- 
vantage, not for that of others. 

Follow public sentiment until Wall Street is practically unani- 
mously bullish or bearish! Then turn boldly to the other side of 
speculation ! 

Unless in a position to protect a trade against extreme possibil- 
ities, it is a good rule not to trade at all. 

.Never buy or sell, unless there are logical reasons for believing 
that the price is low or high enough for that purpose, all things 
considered ! But if the trader will buy and will sell, when these 
reasons come to hand, he will add to his possessions from year to 
year. 

On declines, buy the best stocks! On advances, sell short the 
worst ones ! 

It is so definitely known to every stockbroker that out of every 
1,000 men who have lost money in speculation, fully 900 of them 
have been quick traders, that one lacks the heart to try to give to 
this class of people any advice whatever, except the famous one of 
London Punch: "Don't." There is little in quick trading except 
for a gifted few. 



There is no reason why the long pull trader, acting in accordance 
with the system above set forth, should not make a fortune in the 
course of a series of years, no matter how small his beginning. But 
he must positively obey the rules of the game. 



XVIII 
MAXIMS OF WALL STREET 

A good investment is a good speculation, and if it is not a good 
speculation, it is not even a safe investment. 

Actual value will tell in the end. 

No man ever makes himself poor by taking profits. 

The dog which snaps the quickest gets the bone. — Daniel Drew. 

An insider's position is as good as money in the chest. 

The market is made by the minds of men. What the minds of 
men have made, your mind can solve. The problem requires study, 
practice, experiment, persistence and unlimited patience. — Wyckoff. 

All stocks move, more or less, with the general market. 

After a period of great dullness, the start upward is always due 
to some special event or to manipulation. 

Buy when everything looks the blackest and when every one else 
wants to sell ! 

Securities can usually be bought at less than their real value dur- 
ing a sudden scare or panic. 

Wait patiently for the proper moment; and never buy or sell 
simply for the sake of doing something ! 

The first requirement of success in Wall Street is patience. — Jay 
Gould. 

If you do not see the way clear, do nothing ! 

Sell when securities are high, especially if the price is above the 
investment value ! 

Manipulation, which does not bring public cooperation, always 
ends in reaction. 

A manipulator may be all-powerful for the moment, but only for 
the moment unless conditions and the public are with him. 

In a general decline, merit in a particular stock does not count 
for the time being. 

The market will be here to-morrow. 

227 



228 MONEY MADE IN SECURITY INVESTMENTS 

Business is a scramble for the cash. Nobody looks for manners 
around the meal tub.— Daniel Drew. 

Cut your losses short and let your profits run ! 

Always have some resources free for bargains ! 

Values may and do foreshadow higher or lower prijees, but 
manipulation is necessary to realize thern. 

All things come to him who waits. 

The opportunity of a lifetime must be improved during the life- 
time of the opportunity. 

No grist can be ground with water which has run past the mill. 

Look before you leap ; but he who never acts never makes. 

The public usually buys at the top and sells at the bottom. 

Prices always look strongest at the top and weakest at the bottom. 

The man who is right six times out of ten will make his fortune. 
— James R. Keene. 

Those who can give good advice are least anxious to. 

Make up your mind how much profit can reasonably be expected ; 
when your figure is reached, sell ; and do not go in again until after 
a strong reaction ! 

Speculation begins where certainty ends. 

Caution is the father of security. 

If you go into Wall Street to make your fortune, you will prob- 
ably not even make your living. If you go there to make your liv- 
ing, you may make your fortune. — S. V. White. 

Buy privately, but you may sell publicly if you will ! 

In buying stocks, select those whose earning power, and thus their 
actual value, is above the price. 

No one is always right, but successful men are more often right 
than wrong. 

Wall Street advice is free and is worth it. — Thomas W. Lawson. 

A man's learning dies with him; even his virtues fade out of 
remembrance; but the dividends on the stocks he bequeaths to his 
children live and keep his memory green. — Oliver Wendell Holmes. 

If you intend to sell on the next rise, buy by preference those 
securities which have a broad and free market ! 

Be silent when a fool talks ! 

Never sell stocks on account of a strike!— Addison Cammack. 



MAXIMS OF WALL STEEET 229 

Do not try for the exact top, or bottom, of the market, because 
you are liable to overstay ! 

Small losses often prove great gains. 

Do not sell a security, which has long been inactive, just as it 
begins to move upward ! 

Follow a strong movement with a stop-loss order a few points 
down ! 

Dullness after a protracted decline usually foreshadows a rise. 

The right time to buy (Amalgamated Copper) is between ten 
a.m. and three p.m. — H . H. Rogers. 

Do not plunge recklessly after one or more successful trades ! 

It seldom pays to be stubborn. 

If industrials work lower, a reaction in trade is denoted. This 
ensures a smaller tonnage for railroads and a fall in railroad stocks. 

Little and often fills the purse. 
, The market does not change its main direction suddenly. 

Never sell stocks short in the Spring, when the sap is running up 
the trees ! — Daniel Drew. 

Never ask a leader of the market what he is doing ; the question 
would be impertinent. 

An investor can do nothing to make prices, but he can take ad- 
vantage of them. 

He who sells what isn't his'n must buy it back or go to prison. 

Express no careless opinions about securities; no one can tell 
what harm an unthinking word may do ! — Jacob Field. 

If a market receives a sudden shock, remember that the worse 
and more violent the break, the more rapid the recovery. 

Great financiers never oppose general conditions, but they sell or 
buy according to their judgment as to the state of affairs, which will 
prevail months and even years ahead. 

When everybody is bearish, buy! When everybody is bullish, 
sell! 

Never tell what you are going to do until after you have done it ! 
— Commodore Vanderbilt. 

When some one gives you a tip, do not act at once ! Take time ! 
Think it over ! Secure the fullest information ! Then act !— Louis 
V. Bell 



230 MONEY MADE IN SECUKITY INVESTMENTS 

Panics come out of a clear sky like violent storms. 

No profit is secure until the stock is sold. 

If prices are high, then whoever looks for higher prices yet must 
have sound reason to expect a betterment in earnings or general 
conditions. 

New York is a world's market and whatever promotes or unset- 
tles confidence abroad is reflected here at once. 

A bull market is possible with high money. 

During a storm it is sometimes best to stay at home. 

In a bull market, never sell out at a loss stock which has been 
bought during a bad break ! 

The fiercest bear is a bull who has sold out too soon. 

The market will always do well enough as long as earnings keep 
up and money is easy. — J. P. Morgan. 

Buy when every one is selling. Sell when every one is buying. — 
Rothschild. 

Winds blow hard on high hills. 

Never be a bear on the United States. If you do, you will go 
broke.— J. P. Morgan. 

Prices do not respond to conditions, they respond only to manipu- 
lation. — The motto of cynics. 

What goes up must come down. 

If you have planned for large profits, never take small ones ! 

Ample and accurate information is the first step toward success. 
-J. J. Hill. 

The secret of wealth : Never sell stocks at the top and never buy 
at the bottom. In other words, never wait for the extremes of the 
market. — Baron Rothschild. 

Everybody is bigger than anybody. — Jay Gould. 

When the public really starts to buy, the work of several hundred 
insiders who are trying to sell is of no avail in putting the market 
down. 

An aphorism, with which, however, the author differs : "Statistics 
are post-mortems. They are no guide to what the next statistics 
will be. Opinions of future values, based upon past statistics, are 
naturally valueless." — George Stuart Smith. 



XIX 

FINANCIAL TERMS AND PHRASES 

A FEW OF THE TECHNICAL TERMS IN USE IN FINANCIAL CIRCLES 
DEFINED FOR THE BENEFIT OF THE GENERAL READER 

Account.— More in use in London than here. In England stocks 
are seldom paid for next day, as they are in New York, but are set- 
tled for fortnightly. Two days are set apart, twice a month, for 
the settlement of contracts in stocks. To "buy for account" means 
that they are to be paid for at the next fortnightly settlement. In 
Paris and Berlin, settlements are made once a month. 

Adjustment Bonds. — Bonds issued for the adjustment of the 
finances of a company. They are a lien on any new property, not 
covered by previous bond issues, and, with reference to other prop- 
erty, they take their place after already existing liens. 

Arbitrage. — The buying of stocks in one market, where they are 
low, and the sale of them in another, where they are higher. Or t*he 
reverse. The profit is usually small and results from quick turns in 
the stocks. A class of arbitrageurs in New York devote themselves 
to arbitrage transactions between that city and London. 

Averaging. — To buy every point or 2 points or so down, in a fall- 
ing market, or at the bottom of a strong decline, or to sell short on 
a similar scale up, or near the top of a rise, in a rising market. The 
object is to make total transactions average a satisfactory and safe 
figure. 

Bank Reserves. — See "Keserves." 

Bear. — A bear on stocks is a man who believes that the market will 
go down, who therefore sells short in order to buy back at a profit, 

231 



232 MONEY MADE IN SECURITY INVESTMENTS 

and whose operations, if he is a manipulator, tend to aid the fall 
in prices. 

Bill of Exchange.— A draft, or written order, for the payment of 
money, issued usually against a shipment of goods, the draft to be 
paid at the point to which the shipment is made. The term, bill of 
exchange, is used in international transactions, but it means no 
more than draft. It is drawn by one person upon another and is 
to be paid to a third party or bank. 

Bourse. — The name given in Europe to a stock exchange. 

Broker.— A man who executes an order for the purchase or sale of 
securities, in behalf of a customer, charging a small commission 
for his services. 

Bucket Shop. — The name given to an office, which is ostensibly a 
regular brokerage concern, but which as a rule has no connection 
with or membership in any established exchange. The concern ac- 
cepts orders for the sale or purchase of stocks, but usually records 
the order without executing it, or, if the order is executed, then the 
bucket shop sells as much stock as the customer buys, or buys as 
much as he sells, thus never carrying stocks. If the customer wins, 
the bucket shop loses. Conversely, if the customer loses, the bucket 
shop wins. Practically, the bucket shop bets against its customers 
as to the course of the market. Bucket shops are, as a rule, located 
in the smaller cities of the country, one in each place, and a group 
of them belong to, or are controlled by, certain individuals in New 
York. It is asserted that when the bucket shops of the country are 
loaded with orders for long stock for their customers, the manager 
in New York engineers a raid upon the market, with a view to 
wiping out customers' accounts and pocketing the money, and that 
the manager of a bucket shop who does not so mislead his customers 
as to despoil them of their margins, is promptly discharged. 

Bull. — A man who believes that the market is going up, who buys 
and carries stocks for a rise, and who labors to bring about higher 
prices. 



FINANCIAL TERMS AND PHRASES 233 

Call.— A contract which pledges the man who sells the "call" to 
deliver a certain stock, at a certain time, at a price named. The 
seller receives a sum of money, say from $50 to $100, for the "call." 
Practically, the transaction is a bet between the parties as to the 
future course of the stock. A group of street brokers in New York 
devote themselves entirely to the sale of calls, puts and straddles. 
They are all classed under the general head of "privileges." The 
utmost that a man can lose on a call is what he paid for it. 



Call Loans. — Money loaned out on collateral security, with the 
understanding that the loan is to be repaid at any time on demand, 
that is to say, on call. 



Cats and Dogs.— A Wall Street term, applied to obscure, non-divi- 
dend paying or worthless stocks. When the "cats and dogs" are 
suddenly boomed in price, the bull party is supposed to be for the 
moment at the end of its resources for continuing the upward move- 
ment, or wishes to distract attention from the actual distribution of 
pool holdings to the public. 



Clearing House. — A building to which all the banks of a large city, 
connected with the Clearing House Association, send all the checks 
against other banks, received in the course of the previous day's 
business. Each bank presents to the representative of each other 
bank, gathered in a large room and seated at desks supplied for 
the purpose, the checks against it. If a bank has, on the total of 
these mutual exchanges, a credit balance, it receives from the Clear- 
ing House the amount in cash. If it has a debit balance, it must 
send the amount in cash promptly to the Clearing House. The 
credit and debit balances are exactly equal; and all the money re- 
ceived from one set of banks is at once paid out to the others. 
There is also a clearing house, connected with the stock exchange, 
in which stocks are "cleared" in the same way as the checks in the 
Clearing House of the banks. It is the Clearing House which pub- 
lishes the weekly statement, showing the condition of the banks. 



234 MONEY MADE IN SECUEITY INVESTMENTS 

Clearing House Loan Certificates. — These are certificates for 
money, issued in times of monetary stringency, by the Clearing 
House, upon deposits of securities as collateral. They are received 
by all the banks in the association, in lieu of cash, in the settlement 
of balances against each other, and they enable the banks to go 
through a financial crisis without suspending payment. During 
the panic of 1907, small Clearing House certificates were circulated 
in a few cities in this country, in lieu of national bank or other 
currency. 

Coal Roads. — The railroad lines leading from the anthracite coal 
mines of Pennsylvania, either to the seaboard or the interior. 
These roads formerly owned in fee simple enormously valuable 
anthracite coal mines; and one of the motives which inspired con- 
struction of the lines was to create an outlet to market for the coal. 
The mines were operated by the railroad companies themselves, 
until the famous "commodities clause" was introduced into the 
inter-State commerce laws, June 29, 1906, which forbade railroads 
to transport coal mined and owned by themselves. May 3, 1909, 
the United States Supreme Court upheld this law; and, as a con- 
sequence, the coal roads have since 1909 dispossessed themselves of 
their coal properties by creating corporations to own them, the 
shares of these corporations having been distributed among the 
stockholders of the respective railroads. 

Commission. — A broker's charge for the sale or purchase of securi- 
ties. It amounts to % of one per cent for each transaction, or 
$12.50 for each 100 shares of stock. 

Contango. — A term used in London, meaning the charge paid by 
the buyer of stocks for continuing his contracts until the next fort- 
nightly settlement. 

Corner. — A situation, when all the floating supply of a stock has 
been purchased by a pool or by operators, who can then dictate the 
price at which sales shall be made. It is a fearful weapon against 
those who have sold a stock short. A great many successful corners 



FINANCIAL TEEMS AND PHRASES 235 

have been engineered in Wall Street. Many others have been at- 
tempted but failed. Several of the extraordinarily high prices, 
recorded in 1864, were due to corners. Commodore Yanderbilt 
managed one of them in 1864 by buying up the whole floating 
supply of Harlem Railroad shares, forcing them from 86% in 
January to 285 in June. Another corner of 1864, which collapsed, 
was that in Pittsburgh, Fort Wayne & Chicago, which rose from 
82% in January to 152% in April and then suddenly and disas- 
trously slumped to 87, a few months later. In 1872, there were 
several corners, the most conspicuous being that in Chicago & North- 
western, which was steadily bought until it had risen from 511/2 in 
October, 1871, to 230 in November, 1872. A notable corner was 
that in Northern Pacific in 1901 as a result of competitive buying 
by rival interests, which forced the price from $77*4 in January to 
$700 a share in May, and to $1,000 in a few private settlements. 
The rules of the New York Stock Exchange are now so framed as 
to discourage corners of a speculative character in stocks. They 
upset the stock market and inflict great losses on the public. 

Covering. — The repurchasing of stocks, which have been sold short. 

Domestic Exchange. — Drafts for money issued in one city and 
payable in another. The discount, or premium, at the banks on 
domestic exchange shows which way the tide of money is tending 
between the two cities. If a bank in Chicago has too much money 
on deposit in New York and can use its funds more profitably at 
home, it buys drafts on New York only at a discount, and sells 
drafts on New York either without charging a premium or at a 
discount. 

Federal Reserve Banks.— The Federal Eeserve law was enacted 
December 23, 1913, and the new banking system went into full 
operation in November, 1914. The United States was divided into 
twelve reserve districts, and all national banks were required to 
subscribe a sum equal to one-sixth of their respective capital and 
surplus to the stock of Federal Eeserve banks of their respective 
districts. The amount of reserve to be held against deposits was 



236 MONEY MADE IN SECUKITY INVESTMENTS ' 

reduced, thus freeing an enormous amount of legal tender money 
for use in loans to merchants and other borrowers of money. Pro- 
vision was made for the issue of emergency currency. It is sup- 
posed by the authors of the law, that panics will hereafter be 
rendered almost impossible, or at any rate that they will not be due 
to monetary stringency. The Federal Eeserve system originated, in 
effect, with the Monetary Commission of which Senator Aldrich of 
Ehode Island was chairman, but was enacted finally by the political 
opponents of the party to which Mr. Aldrich belonged. 

Finance Bills.— Foreign exchange is sometimes sold by the inter- 
national bankers, not against a credit for goods, produce, or securi- 
ties sold abroad, but against money borrowed abroad. In that case, 
the drafts are called finance bills. 



Flat. — Without interest. When stocks are loaned flat, it signifies 
that the short interest in stocks is large. 

Foreign Exchange.— Drafts for money, issued by bankers in the 
United States against bankers abroad. When goods, produce or 
securities are bought in the United States by foreign purchasers, 
the sellers here go to an international bank and deposit their own 
drafts against the purchasers, with bills of lading, etc., and receive 
the banker's own drafts against his correspondent abroad. Cotton 
is the quickest maker of foreign exchange in normal years. 
Whether exchange is high or low is of great importance to the finan- 
cial world. When it is high, the tendency is toward exports of 
gold. We have been buying more foreign goods or a larger quantity 
of American securities, held abroad, than we have sold and the 
excess must be paid for in gold. Conversely, when exchange is low, 
the tendency is toward imports of gold. Par of exchange is 4.8665. 
No exact figure can be named for the gold export and import points 
of exchange, because the figures vary from day to day ; but normally, 
when exchange sells around 4.89 or higher, gold exports are indi- 
cated ; and when it sells around 4.842 or lower, gold imports are 
probable. 



FINANCIAL TERMS AND PHRASES 237 

Fractional Lot. — Stocks are sold, normally, in blocks of 100 shares 
or their multiple. A fractional lot is less than 100 shares. 



Giving Up. — Frequently a situation arises in which a broker does 
not wish to appear personally as a buyer or seller of a certain stock, 
or a customer wishes to operate through another than his regular 
broker. A different broker is employed to execute the order, who 
then "gives up" the name of the broker for whom the order has been 
executed, and that ends the transaction. 

Granger Roads. — The northwestern lines, whose earnings are in a 
large measure due to the transportation of grain. The leading 
grangers are the Atchison, Great Northern, Chicago & Northwest- 
ern, Northern Pacific, St. Paul, Rock Island, Alton, and Union 
Pacific roads. 

Holding the Bag.— Taking all the shares of any particular stock 
which are offered for sale, without bidding for them. It signifies 
either ( 1 ) quiet accumulation by pools, syndicates and private bank- 
ing interests at the conclusion of a substantial decline; or (2) an 
unwilling taking of the shares by strong interests in order to pre- 
vent an utter collapse in the market, in a time of alarm or panic. 
Stock thus purchased to support the market is often peddled out 
again when the scare is ended. 

Kaffirs. — A name used in London to designate South African gold 
mining shares. A famous boom occurred in Kaffirs in London in 
1895, which collapsed in October and November, inflicting enor- 
mous losses upon the public. 

Lamb.— The novice in stocks, the credulous and inexperienced 
upon whom the unscrupulous prey. Sometimes called, in the 
cynical parlance of Wall Street, the "sucker." George Stuart Smith 
calls him the man who is wholly ignorant of when the insiders 
have sold out. 



238 MONEY MADE IN SECUEITY INVESTMENTS 

Legal Tender. — Ten kinds of money are in circulation in the 
United States. The following are legal tender : Gold coin, standard 
silver dollars, and Treasury notes, act of July 14, 1890, for all 
debts, public and private. United States notes (greenbacks), for 
all purposes, except duties on imports and interest on the public 
debt. Subsidiary silver coin, in amounts not more than $10, in one 
payment. Minor coins, to the amount of 25 cents. The following 
are not legal tender: Gold certificates, silver certificates, and na- 
tional bank notes; but the certificates are receivable for all public 
dues, and national bank notes are receivable for all public dues 
except duties on imports. The Government has the right to pay out 
national bank notes for all its debts, except interest on the national 
debt and except in redemption of national currency. 

Long. — To be "long" of stocks is to have bought them for a rise. 

Manipulation.— The operations whereby stocks are forcibly raised 
or lowered in price, without reference to outside conditions. The 
art of manipulation has been carefully studied and proceeds with a 
thorough knowledge of human nature. If the public are to be 
attracted into buying a stock, it must be kept active. Operators 
usually resort to matched orders, that is to say, they order one 
broker to buy a certain number of thousand shares of a stock at a 
given price and another broker is ordered to sell an equal quantity. 
Another lot is bought at a higher price and a similar lot sold at 
that price or better, if better price can be obtained. The process, 
carried out with energy, sends the price of the stock up. When a 
stock is to be depressed in price, similar tactics are resorted to on 
the downward slide. The exchanges forbid fictitious sales; but as 
these matched sales and purchases are cleared regularly through 
the stock exchange clearing house, and as a commission is paid upon 
them, they form a regular feature of every campaign in stocks and 
cannot be entirely prevented. The art of manipulation has other 
features, among them the setting afloat of rumors and publication 
of news, calculated to aid the result desired by the operator. Dur- 
ing periods of accumulation little is heard in Wall Street except 



FINANCIAL TERMS AND PHRASES 239 

depressing news. In a period of distribution, scarcely anything is 
heard except the most inspiring news. 

Margin. — When a man buys stocks on a "margin" he does not pay 
the full value for them, but deposits with his broker a certain per- 
centage of the par value. Ten dollars a share was formerly the 
customary margin and is so yet on low priced shares. But the 
hazards of speculation have taught traders at last to employ mar- 
gins of from $20 to $30 a share; and, on issues subject to wild 
manipulation and wide fluctuations, from $40 to $75 a share. The 
stocks, bought for the customer of a commission house, must, how- 
ever, be paid for in full, and the broker does that out of money he 
has borrowed from the banks on time or call loans. A few active 
speculators, with great resources and backed by powerful interests, 
have in the past arranged to have their stocks carried on a 5 per 
cent margin. Whatever the margin, say 10 per cent, if the stocks 
decline in value an equal number of points, the margin is wiped 
out. The buyer of stocks is obliged to pay interest on the amount 
of money advanced by the broker upon the purchase. Upon short 
sales of stocks, no interest is charged, which makes short sales a 
favorite with many traders. 

Moratorium. — A legal enactment, resorted to only in times of 
great financial stress, whereby the payment of certain debts, or all 
debts, by the people of a country is postponed for a period of 
months. Upon the outbreak of general war in Europe in 1914, 
nearly all the principal states in Europe declared moratoriums, in- 
cluding England, France, Russia, Norway and Sweden, Denmark, 
Bulgaria, Turkey, Switzerland, and Italy. Moratoriums were also 
declared in Brazil, Uruguay, Ecuador and China. 

Parity. — Equality in value. If stocks sell in Boston at the same 
price as in New York, they sell on a parity. 

Point. — A "point" in stocks is $1 a share ; y 2 point, half a dollar a 
share; and so on. 



240 MONEY MADE IN SECUEITY INVESTMENTS 

Pool. — An association of individuals for operations in the stock 
market. A pool aims either to bull or bear stocks. There is always 
a manager of the pool, who assigns to each member the amount of 
stock he must carry until the deal is finished, and the part he shall 
play in the daily buying and selling required for manipulation of 
the stock. In order to conceal the purposes of the pool and its exact 
position, some of its members sometimes sell stocks openly, while 
the pool is realty accumulating, and vice versa. A "blind pool" is 
one in which the members contribute the money for its operations 
but take no part in them, the manager alone knowing what is being 
done until the final accounting to the members. 

Put. — A "put" entitles the buyer thereof to "put" or deliver the 
stock to its signer, within a time and at a price named. The buyer 
pays a certain sum for the privilege, perhaps $50, perhaps $100. A 
"put" is only one form of betting that a stock will, or will not, 
decline in price. In any case, if the buyer of a privilege loses, his 
entire loss is limited to the amount paid for the privilege. Kussell 
Sage was, in his time, one of the foremost dealers in puts and calls ; 
but the business is now practically confined to a group of open air 
brokers, who meet their clients in New Street, New York city. 

Pyramiding. — A dangerous, but, when successful, a highly profit- 
able speculative practice. A trader buys 100 shares of stock, for 
instance, on a 10 point margin (or he can pay for it outright). 
The stock advances 10 dollars a share in price and the trader's 
profit would be 10 dollars a share, if he should sell. But, employing 
the paper profit of 10 dollars a share as margin, he buys another 100 
shares. Again, there is an advance of 10 dollars more a share. Then 
the trader employs the paper profit on his 200 shares to double up 
and buy 200 more. This process is repeated until the market is 
near culmination. The trader would then have, after a 40 point 
advance, 1,600 shares of stock, all carried on the original 10 per 
cent cash margin. If he sold after a 50 point advance, he would have 
a profit of $31,000 on the total transaction. The danger of this form 
of pyramid inheres in the fact, that a 10 point reaction at any stage 
of the advance would utterly destroy all the trader's paper profits 



FINANCIAL TEEMS AND PHKASES 241 

and his original 10 point margin as well. A market, or a stock, 
which is full of speculative pyramids fairly invites the thunderbolt, 
because it is for the interest of the managers of a bull campaign to 
smash the pyramids when they can. Many of the mysterious and 
unexplained 10 to 15 point reactions in the stock market are due to 
the deliberate toppling over of pyramids by the pools. A safer 
pyramid is to buy only 100 shares at a time on the way up. In that 
case, the margin grows larger the more the stock advances. The 
reader can figure this out for himself. Pyramiding on short sales 
is carried on, on precisely the same basis as pyramiding on the 
way up. 

Reserves. — The banking laws of the United States require that all 
national banks shall maintain a reserve against deposits, most of it 
in their own vaults, part of it in the Federal Reserve Banks of their 
respective districts, consisting of gold coin, gold certificates, silver 
coin, silver certificates, "greenbacks" or United States legal tender 
notes, and clearing house certificates which are payable in gold or 
legal tender- In central reserve cities, the reserve must be equal to 
15 per cent of the^ aggregate demand deposits (deposits which are 
payable within thirty days) and 5 per cent of demand deposits (which 
are not payable within thirty days) . In reserve cities, the amount of 
reserve is 15 and 5 per cent. In all other cities 12 and 5 per cent. 
Formerly, the large cities were required to maintain a reserve of 25 
per cent on all deposits and the smaller cities 15 per cent. When re- 
serves fall below the legal limit, a bank can loan no more money. 

Short. — To be short of stocks is to have sold them for a fall. The 
trader has sold his long stock and now "goes short." He orders the 
sale of a certain number of shares short and his broker disposes of 
them at ruling prices. The broker must deliver the shares thus sold. 
He therefore borrows them from some other commission house and 
pays for them in full with his own check. When short sales are 
covered, that is to say repurchased, the stock then bought is deliv- 
ered to the house from which the original lot was borrowed. As the 
broker who loans the stock and receives pay for it in cash can then 
loan out the money so received at interest, he usually pays interest 



242 MONEY MADE IN SECUEITY INVESTMENTS 

to the borrowing broker. When, however, the short interest in the 
market is large, he pays no interest or only a nominal rate. The 
character of a short sale is not generally understood. Suppose that 
there are 1,000 shares only of a given stock. Each one is owned by 
somebody. The speculator who sells 10 shares of it short, not then 
being in physical possession of any of the stock, really creates 10 new 
and unauthorized shares of the stock; and those 10 new fictitious 
shares must eventually be retired by a covering of the short sale. 
He who is short of stock, when a dividend is paid thereon, is com- 
pelled to pay the amount of that dividend to the purchaser of his 
short stock. Commodities can be sold short, the same as stocks. 

Spreads and Straddles. — A "spread" is a double privilege, which 
entitles the holder either to deliver to or call from the signer the 
stocks named in the contract at the prices stated. If the price in 
each case is the same, the privilege is a "straddle." 

Stop Orders. — The same as "stop-loss orders." If a trader is car- 
rying long stock, and wishes to make sure of some of his profits, in 
the event of an unexpected decline, or if the market is going against 
him and he wishes to limit his loss, he gives the broker a "stop 
order." If he has bought stock at 100 and it has risen to 110, he 
might say "sell at 105, stop." Then if the stock falls to 105, it is 
sold at once and the owner has at any rate made five points on his 
purchase. If he has bought at 100 and the stock does not go up, 
he might order the broker to "sell at 98, stop." His loss would be 
limited to two points. Stop orders are used conversely by those who 
sell short. 

Surplus Reserve. — The amount of reserve in lawful money of the 
associated banks, or of a single bank, in excess of the percentage 
required by law. If surplus reserve is large, the loaning power of 
the banks is equally so. If surplus reserve disappears, and especially 
if it is replaced by a deficit, the loaning power of the banks is utterly 
exhausted. In the latter case, the banks are obliged to call in and 
reduce their loans. 



FINANCIAL TERMS AND PHRASES 243 

Technical Conditions.— A rally in the market is sometimes engi- 
neered on "technical conditions," which would mean that the mar- 
ket was oversold, i.e., the short interest was unduly large. A decline 
may take place on a different set of technical conditions, the market 
being overbought, that is to say, all the brokerage houses loaded 
with long stock and no short interest in the market. 

Washed Sales.— Practically the same as "matched orders." See 
"Manipulation." 

Wild Cat Stocks. — Virtually the same as the "cats and dogs," the 
"pups," etc. 



XX 

PRICE RANGE OF LEADING STOCKS 

AN INSTRUCTIVE EXHIBIT OF THE CHANGES IN MARKET VALUE OF 
EIGHTY-FIVE PROMINENT STOCKS 

The high and low prices, by years, of 85 conspicuous stocks in the 
New York market are set forth on the following pages. 

In accordance with rules, adopted by the New York Stock Ex- 
change in 1915 and 1916, both the market value of all shares and 
the amount of all dividends are hereafter to be expressed in dollars 
per share. For many years, and indeed until on and after October 13, 
1915, all the railroad half shares and several half share industrials 
like Pennsylvania, Lehigh Valley, Eeading, Delaware, Lackawanna 
& Western, Long Island, and Westinghouse were quoted in New 
York at double price, as though their par value were $100. Divi- 
dends were specified also at their per cent upon par value. They were 
so quoted in previous editions of this book. In accordance with the 
new and more logical rules, the quotations and dividends in the 
following tables are set forth on the basis of dollars per share. 

Inspection of these tables will indicate the extreme range of price 
in prominent shares from the bottom of panics to the top of the 
succeeding booms, and will thus supply security owners with a 
suggestion as to the amount of money to be made in long pull opera- 
tions in stocks. The distance from the top of a boom to the bottom 
of the next serious depression will indicate to security owners the 
urgent necessity of selling even their soundest stocks, when bull 
markets are at or near their crest. 

The comparatively low valuations in 1913-1915 of Union Pacific, 
Southern Pacific, Pennsylvania, United States Steel, preferred, 
Great Northern, Northern Pacific and other American issues, which 
have been owned by European investors upon an enormous scale, 
grew out of the persistent liquidation of those shares in the New 
York market, a liquidation which is yet in progress in 1916. 

244 



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XXI 

SURPLUS DEPOSITS AND INTEREST RATES 

IN" previous editions of this book, statistical tables were printed 
setting forth the surplus deposits of the National and State banks 
(omitting trust companies) in the New York Clearing House, for 
each week of the year for a series of years. It is not necessary to 
print the statistics in that elaborate form. It is desirable, however, 
to retain the record ; and the tabulation is now given in brief. Ex- 
treme points of high and low of surplus deposits will be sufficient 
for a clear understanding of the importance of this subject. In the 
condensed tabulation which follows, surplus deposits are stated in 
round numbers. Where a minus sign is prefixed to the figures, the 
loans are in excess of deposits. When deposits are less than loans, 
there is apt to be a deficit in bank reserves, although manipulation 
occasionally prevents this. The following comments should be 
compared with the tables for those years on the succeeding pages. 

1890 

Surplus deposits had been ample for two years and call loans moderate, 
except in the crop season of 1889. In 1900, loans passed deposits in the 
latter part of the year; and, in consequence, after the January rise, stocks 
trended downward. Money was high, loans went to prohibitive rates, and 
troubles in Buenos Aires and the Baring failure caused a panic. 

1891 

The banking situation was improved by the liquidation. A money flurry in 
the Fall led to a break in stocks ; and then as money came back to the banks, 
stocks rose, ending the year at about the highest. 

1892 

Surplus deposits were large until the Fall. Then they fell almost to zero. 
Simultaneously, surplus reserves almost vanished also, falling to $539,050 
on October 15th. Stocks were strong the first half of the year, and rose 
above 1891. They were weak and sagging during the last six months. The 
market turned in May, 1892, for a strong downward movement. 

262 



SUKPLUS DEPOSITS AND INTEKEST EATES 263 



1893 

January was top of the year, although, after a strong reaction, there was 
a good Spring rise. The banking situation then became strained, as 
eloquently set forth by the loss in surplus deposits and rise in interest rates. 
For six weeks, July 29th to September 2d, there was a deficit in bank re- 
serves of from $1,256,550 to $16,545,375. A great fall in stocks took place 
into July and the market hung low until the Fall, when surplus deposits 
began to heap up and there was a good recovery in prices, amounting to 
about half the loss since January. 

1894 

Surplus deposits were enormous in 1894 and interest rates extremely low. 
A great bull market might have originated in 1894, were it not that the 
Democratic party had gained control of the Government and eliminated a 
large amount of protection from the tariff laws. This proceeding disin- 
clined the public to making any new financial ventures. A bull movement 
could not have been supported. The stock market of 1894 was a trading 
affair, with 10 and 20 point movements back and forth. 

1895 

Surplus deposits were ample and interest rates moderate until the last three 
months. Heavy buying of stocks for a bull movement took place in June, 
and in fact the market started upward. By Fall, prices had risen above the 
level of the year before. The improvement was checked in December by the 
famous Venezuelan message to Congress, which brought on a panic-stricken 
decline into December, cancelling all the gains of the year. Sudden flurries 
of this character are always possible, no matter what the banking position is. 

1896 

There was steady depletion of banking resources in 1896 and surplus de- 
posits fell below zero, although bank reserves did not, while a number of 
unfortunate influences prevailed — dull times, the Bryan scare in politics, 
gold exports, and remarkably high rates of interest, etc. The election of 
McKinley in November changed the aspect of affairs. Stocks declined 
heavily into August, 1896. In November they were bought for a bull market 
and the country settled down to a new era of prosperity. 

1897 

The firm foundation for a long bull market was laid in 1897 by a great gain 
in surplus deposits and low interest rates. After a good shake out in April, 
stocks moved upward with a rush and regained nearly all the ground lost 
since 1893. 

1898 

Surplus deposits were again enormous for those times and interest rates 
were low. The war with Spain held the market back for a time; but after 
July, the swing was toward higher prices. December was high point of the 
year in stocks. 



264 MONEY MADE IN SECUKITY INVESTMENTS 



1899 

Stocks rose steadily under the influence of phenomenal surplus deposits, 
with normal reactions, until August; but then, surplus deposits were falling 
and interest rates were extremely high, once in December rising to 186 per 
cent. For three weeks in November, surplus reserves fell between $312,025 
and $2,788,950 below zero. British defeats in South Africa and high money 
led to a strong break in December; but the times were good and this was 
only a halt in a bull market. 

1900 

Surplus deposits were well above the danger line and loans were made at 
moderate rates of interest. Some of those long of stocks were tired out this 
year by the sluggish and inert market, and in June others were being shaken 
out. In the Fall, the rise was resumed with energy. 

1901 

A remarkable year, attributed by the astrological fraternity to a conjunc- 
tion of Jupiter with Saturn, something which happens every thirty years. 
Stocks boomed. Surplus deposits were large, but there were several flurries 
in interest rates, not enough, however, to stop the bull market. There were 
a number of sudden breaks in stocks and the May panic is memorable, but 
these were due to special causes and not to any danger in the banking situa- 
tion. The banks were in strong shape, all the year. 

1902 

There was a great rise in stocks in 1902 until August. Loans at the New 
York banks gradually attained excessive proportions ; and finally, at the end 
of the year, they were heavier than deposits, a state of affairs which had not 
existed since 1896. Interest on call loans was prohibitive the latter part of 
1902, and time loans went above the legal rate. There was a $1,642,050 
deficit in surplus reserves, September 20th. It became imperative for the 
banks to reduce loans and prices fell heavily after the great boom in August. 

1903 

The banks were heavily loaded with loans, and surplus deposits ranged 
below zero during forty-two of the fifty-two weeks of the year. By super- 
human efforts, bank reserves were prevented from showing a deficit, al- 
though they were low. Interest rates were high, and after a handsome 
January rise, stocks fell until August, recovering slightly thereafter. 

1904 

The banks acquired cash heavily during 1904 and surplus deposits mounted 
enormously. Call loans were made at nominal rates. A bull market was the 
logical outcome, and a rise began in March, lasting until November. 

1905 

Surplus deposits were ample, the first half of the year, and the stock mar- 
ket rose to the highest average level ever known, exceeding 1864. Money 
was in good supply until the latter part of the year. Then depleted bank 
resources and high money halted the rise in stocks. Bank reserves showed 
a deficit of $2,428,800 on November 11th, and $1,246,525 on December 9th. 



SUKPLUS DEPOSITS AND INTEREST RATES 265 



1906 

The stock market reached the highest level on record in January, 1906. 
There were two severe breaks later. A good rally succeeded into the Fall. 
The boom brought on genuine financial stringency and the panic of 1907 
was clearly foreshadowed by the banking position. There was a deficit of 
$2,560,625 in bank reserves on April 7th; $6,577,925 on September 8th; 
$1,514,125 on November 10th; and $6,702,175 on December 8th. 

1907 

Loans were in excess of deposits, the entire year. On November 29th, they 
were $115,000,000 below zero, a condition never before known. There were 
several spasms in money, in consequence. Prices fell steadily, with a rally 
now and then, until November 21st, when forty leading stocks were $52 a 
share, on the average, below the top of 1906 ; special stocks were down from 
$60 to $140 a share. The entire exhaustion of bank resources was farther 
shown by a deficit in reserves of between $54,540,250 and $20,170,350 every 
week from November 16th to December 28th. 

1908 

Liquidation and the halt in business corrected the strain on the banks. 
Money piled up in New York, and stocks rose until the month of December. 

1909 

Money flowed toward New York in January and surplus deposits rose to 
$82,700,000, remaining ample all the first half of the year. Interest rates 
were accordingly low, and favored the bull speculation in stocks, then in 
progress. Thereafter, there was steady depletion of the cash and resources 
of the New York banks, caused mainly by the seasonable flow of money to 
the cotton and grain States, but also promoted by the diminishing balance 
in the foreign trade and by exports of gold. While from May to December, 
loans decreased $165,000,000, deposits fell away $237,000,000; and at the 
end of December, loans were in excess of deposits by $22,900,000. Call 
money rose to 6 and 7 per cent and time loans to more than 4%. The situ- 
ation was not favorable to a continuance of the bull speculation; and stocks 
began to decline. 

1910 

While condition of the New York banks did not favor a bull speculation in 
stocks, and while during most of the year loans were in excess of deposits 
(the excess of loans reaching $40,300,000 in November), it cannot be said, 
in this instance, that excessive loans were the prime cause of the heavy 
liquidation of securities in 1910. They contributed to the result, but that 
is all. The overshadowing factor was legislative and political hostility to 
corporations, which undermined public confidence in securities. The banks 
were not in a position, however, to finance an aggressive bull campaign in 
the stock market. July saw the lowest prices for stocks. 

1911 

The recovery in the stock market ran on until July, 1911, promoted by 
growing ease in bank resources and, be it stated, by the speculative pools, 
which were loaded with stocks and wished to distribute them to the public. 



266 MONEY MADE IN SECURITY INVESTMENTS 

Public confidence in securities had been badly shaken by refusal of the Com- 
merce Commission to permit the railroads to advance their freight rates. 
The pools let go the last week of July and a severe slump in stocks followed, 
amounting to an average of $26 a share in leading denominations. Declin- 
ing resources of the banks helped the bear movement, which ended in Oc- 
tober. 

1912 

Liquidation had improved the condition of the banks. The rise in stocks 
lasted until the last day of September, when foreign liquidation, owing to 
the Balkan war, became insistent. Leading shares were then up in price 
about $30 a share on average from low in 1911. Foreign liquidation bur- 
dened the banks in New York until on December 7th, surplus deposits had 
fallen to minus $31,900,000. Small deficits in bank reserves were reported 
on July 6th, November 30th and December 7th. Stocks declined after 
August. 

1913 

More than half the year, twenty-nine weeks out of fifty-two, loans were in 
excess of deposits in New York. Stocks declined until June. An ensuing 
rally did not hold. 

1914 

No trouble was experienced by the banks until the outbreak of war in Eu- 
rope, July 28th. Foreign liquidation of American securities then led to 
enormous exports of gold. There was a heavy deficit in bank reserves from 
August 8th to October 10th, and surplus deposits fell to $108,600,000 below 
zero on October 10th. A fearful smash in the stock market, the last three 
days of July, closed all the stock exchanges in the United States. 

1915 

Year of a great bull market in industrial shares and of a moderate rise in 
investment issues. The new Federal Eeserve system, and the large imports 
of gold from Europe in payment for munitions and food for the armies, 
caused an unprecedented expansion in bank resources. Money was easy the 
entire year and surplus deposits rose to $305,277,000 on November 13th. 
A plethora of money supplied a sound basis for the rise in stocks. 



SURPLUS DEPOSITS AND INTEREST RATES 267 



1891 



Week 
Ending 


Call 
Loans 


Time 
Loans 


Surplus 
Deposits 


"Week 
Ending 


Call 
Loans 


Time 
Loans 


Surplus 
Deposits 


Jan 3 
Jan 31 
Jun 6 


3 to 9 
11 to 5 
21 to 5 


6 

41 to 5 
6 


$ 1,000,000 
21,000,000 
-2,500,000 


Jul 25 
Sep 26 
Dee 26 


11 to 2£ 
2 to 25 
2 to4£ 


6 to 61 

6 
41 to 5 


$16,000,000 
-3,000,000 
26,000,000 



1892 



Week 
Ending 


Call 
Loans 


Time 
Loans 


Surplus 
Deposits 


Week 
Ending 


Can- 
Loans 


Time 
Loans 


Surplus 
Deposits 


Jan 30 
Apr 9 
Oct 15 


I to 2£ 

II to 2 
4£ to 10 


31 to 4 

31 to 4 

6 


$56,000,000 

37,000,000 

8,500,000 


Nov 12 
Dec 17 
Dec 24 


5 to 8 
4 to 25 
3 to 40 


6 
6 
6 


$6,500,000 
7,000,000 
6,000,000 



1893 



Week Call 


Time 


Surplus 


Week 


Call 


Time 


Surplus 


Ending Loans 


Loans 


Deposits 


Ending 


Loans 


Loans 


Deposits 


Jan 28 21 to 5 


4 to 41 


$33,500,000 


Jul 1 


4 to 74 


6+1 p.c. 


-$15,000,000 


Mchll2 to 60 


6 


2,500,000 


Jul 29 


2 to 74 


6+4 p.c. 


-24,000,000 


May 6 4 to 40 


6 


8,000,000 


Aug 12 


2 to 6 


6+ com. 


-39,000,000 


Jun 17 4 to 25 


6+2 p.e. 


-4,000,000 


Oct 28 


1 to 2i 


5 


36,000,000 


Jun 24 3 to 25 


6+2 p.c. 


-8,000,000 


Dec 30 


£ to li 


21 to 4 


88,500,000 



1894 



Week 
Ending 


Call 
Loans 


Time 
Loans 


Surplus 
Deposits 


Week 
Ending 


CaU 
Loans 


Time 
Loans 


Surplus 
Deposits 


Feb 3 
Feb 17 

May 5 


itoli 

Itoll 

1 toll 


3 to 4 

3 
2ito 3 


$132,000,000 

90,500,000 

113,500,000 


Aug 25 
Oct 13 
Dec 29 


1 

1 
11 to 2 


3 to 4 

2 to 3 

3 to H 


$97,000,000 
90,500,000 
53,500,000 



1895 



Week 
Ending 


CaU 

Loans 


Time' 
Loans 


Surplus 
Deposits 


Week 
Ending 


CaU 
Loans 


Time 
Loans 


Surplus 
Deposits 


Jan 19 
Apr 6 
Aug 17 


1 to 11 

2 to 3 
f to 1 


21 to 3 
4 to 5 
2* to 3 


$72,000,000 
20,000,000 
66,000,000 


Oct 12 

Dec 21 
Dee 28 


lto 3 

1 to 100 

3 to 50 


4 to 41 

4 to 5 

6 


$26,500,000 
27,500,000 
22,500,000 



1896 



Week 
Ending 


CaU 
Loans 


Time 
Loans 


Surplus 
Deposits 


Week 
Ending 


CaU 

Loans 


Time 
Loans 


Surplus 
Deposits 


Jan 18 
Apr 4 
Jul 11 

Aug 29 


2 to 6 

2 to 41 
1 to 2 

3 to 15 


6 

41 to 5 

31 to 41 

8 


$48,500,000 
16,500,000 
26,000,000 
-3,500,000 


Sep 5 
Oct 31 
Nov 7 
Dee 31 


3 to 12 
6 to 127 

4 to 96 
11 to 21 


7 to 8 

Unwilling 

to lend 

at aU 

31 to 4 


-$6,000,000 
Parity 
-3,500,000 
39,000,000 



268 MONEY MADE IN SECUKITY INVESTMENTS 



1897 



Week 
Ending 


Call 
Loans 


Time 
Loans 


Surplus 
Deposits 


Week 
Ending 


Call 
Loans 


Time 
Loans 


Surplus 
Deposits 


Feb 27 
Apr 10 
Jul 24 


11 to 2 
11 to 2 
1 to 1$ 


3 to 31 
3 to 31 
21 to 3 


$76,000,000 
63,500,000 
82,500,000 


Oct 2 
Dec 4 
Dec 25 


21 to 4J- 
If to 2 
2 to 5£ 


4 to 5 

3 to 3* 

4 


$47,000,000 
68,500,000 
58,500,000 



1898 



Week 
Ending 


Call 
Loans 


Time 
Loans 


Surplus 
Deposits 


Week 
Ending 


Call 
Loans 


Time 
Loans 


Surplus 
Deposits 


Feb 4 
Mchll 
Jul 1 


11 to 2 
11 to 3 
1 to 1£ 


3 
H to 6 
3 to Si 


$100,000,000 

77,500,000 

129,000,000 


Sep 23 
Nov 18 
Dec 30 


2 to 61 
11 to 2£ 
2 to 6 


4 to 4£ 
3 to Si 
3 to 31 


$58,000,000 

92,500,000 

104,500,000 



1899 



Week 
Ending 


Call 
Loans 


Time 
Loans 


Surplus 
Deposits 


Week 
Ending 


Call 
Loans 


Time 
Loans 


Surplus 
Deposits 


Feb 24 
Apr 7 
May 26 
Jun 2 


2 to 3 

3 to 16 
2 to 4 
11 to 3 


31 

4 to 41 
3 to 4 
3 to 31 


$139,000,000 
116,000,000 
144,000,000 
143,500,000 


Sep 29 
Oct 6 
Nov 3 
Dec 22 


3 to 20 

3 to 40 

4 to 35 
2 to 186 


6 
6 
6 
6 


$71,000,000 
70,500,000 
60,000,000 
67,000,000 



1900 



Week 
Ending 


Call 
Loans 


Time 
Loans 


Surplus 
Deposits 


Week 
Ending 


CaU 
Loans 


Time 
Loans 


Surplus 
Deposits 


Feb 2 
Meh23 
Jun 1 


2 to 3 

3 to 6 
11 to 2 


4 to 41 

5 
31 to 4 


$96,000,000 
60,500,000 
87,500,000 


Aug 3 
Nov 9 
Dec 14 


H to 11 
1 to 25 
3 to 6 


4 to 41 
41 to 5 
4f to 5 


$90,500,000 
45,500,000 
50,000,000 



1901 



Week 
Ending 


Call 

Loans 


Time 
Loans 


Surplus 
Deposits 


Week 
Ending 


CaU 
Loans 


Time 
Loans 


Surplus 
Deposits 


Feb 8 
May 10 

Jun 28 


If to 21 
3 to 75 
31 to 15 


31 to 4 

41 to 5 

4 


$99,000,000 
80,000,000 
79,000,000 


Jul 19 
Sep 13 
Dec 20 


1 to 5 

2 to 10 
21 to 10 


41 to 5 
5 to 51 
5 to 51 


$83,000,000 
59,000,000 
47,000,000 



1902 



Week 
Ending 


CaU 
Loans 


Time 
Loans 


Surplus 
Deposits 


Week 
Ending 


CaU 
Loans 


Time 
Loans 


Surplus 
Deposits 


Feb 7 
May 9 
Oct 3 


2£to 3 
5 to 25 
3 to 35 


41 to 5 
4f to 5 
6 to 7 


$82,000,000 
58,500,000 
Parity 


Oct 17 
Oct 31 
Dec 26 


5 to 18 
31 to 7 
5 J- to 13 


7 
6 
6 


-$2,000,000 
15,000,000 
-9,500,000 



SURPLUS DEPOSITS AKD INTEREST RATES 269 



1903 



Week 
Ending 


Call 

Loans 


Time 
Loans 


Jan 30 
Meh 20 
Apr 3 
Jun 5 


2-§-to 4 
4 to 7 
5-| to 15 
H to 4^ 


U to 5 

Oi to 5f 
5J to 5i 
5 to 6 



Surplus 
Deposits 



$27,000,000 

-11,000,000 

-5,000,000 

-16,500.000 



Week 
Ending 



Jul 3 
Jul 31 
Nov 20 
Dec 4 



Call 
Loans 



2 to 10 
1 to 3 
4 to 8 
5* to 9 



Time 
Loans 



4£ to 5i 
4-i-to 6 
5 to 5-J- 
5£to 6 



Surplus 
Deposits 



-$13,500,000 

1,000,000 

-40,000,000 

-39,000,000 



1904 



Week 
Ending 


Call 
Loans 


Time 
Loans 


Surplus 
Deposits 


Week 
Ending 


Call 

Loans 


Time 
Loans 


Surplus 
Deposits 


Jan 8 
Mch 4 
May 6 


2 to 6 
l£to 2 

ito H 


4£to 5 
3ito4i 
2* to 4 


-$10,000,000 
40,500,000 
60,500,000 


Aug 12 
Aug 19 
Dec 30 


|tol 

ito 1 
2* to 5 


3 to H 

3 to n 

3£ to 34 


$110,500,000 

110,000,000 

37,000,000 



190c 



Week 
Ending 


Call 
Loans 


Time 
Loans 


Surplus 
Deposits 


Week 
Ending 


Call 
Loans 


Time 
Loans 


Surplus 
Deposits 


Jan 27 
Apr 7 
Jul 28 


If to 2 
2£to 4J 

If to 2 


3£ to 3i 
3£to 4 
3i to 4 


$74,000,000 
37,500,000 
55,000,000 


Nov 17 
Dec 8 
Dec 29 


4 to 25 
4 to 27 
6 to 125 


5£to 6 
5i to 6 
5i to 6 


-$18,000,000 
-24,000,000 
-23,500,000 



1906 



Week 
Ending 


Call 
Loans 


Time 
Loans 


Surplus 
Deposits 


Week 
Ending 


Call 
Loans 


Time 
Loans 


Surplus 
Deposits 


Jan 26 
Apr 6 
Apr 13 
Jul 27 


3i to 4i 

5f to 30 
2 to 25 
2 to 2-J- 


4^to 5 

5 to 5£ 

6 to 6i 
4f to 5f 


$ 6,000,000 

-29,000,000 

-27,400,000 

1,700,000 


Sep 7 
Sep 14 
Dec 7 

Dec 2S 


2 to 40 

3 to 12 

2 to 36 

3 to 18 


6 to 8 
6 to 7£ 
6 to 7 
6 to 7 


-$37,500,000 
-31,000,000 
-62,500,000 
-51,600,000 



1907 



Week 
Ending 


Call 
Loans 


Time 
Loans 


Surplus 
Deposits 


Week 
Ending 


Call 
Loans 


Time 
Loans 


Surplus 
Deposits 


Jan 4 
Mch 15 
May 31 
Jul 5 


2 to 25 
3-J- to 25 
1± to 2i 
5 to 16 


6 to 7 
6 to 7 

4 to 5£ 

5 to 5f 


-$49,000,000 
-49.000,000 
-11,000,000 
-37,000,000 


Jul 26 
Oct 25 
Nov 1 
Nov 29 


2 to 3 
5 to 125 

3 to 75 
3 to 12 


5 to 6 

6 to 7 

6 to 7 
6 to 8 


-$28,000,000 
-64,000,000 
-96,600,000 

-115,000,000 



1908 



Week 
Ending 


Call 
Loans 


Time 
Loans 


Surplus 
Deposits 


Week 
Ending 


Call 
Loans 


Time 
Loans 


Surplus 
Deposits 


Jan 3 

Mch 6 
Jun 26 


5 to 20 
If to 2 
1 to If 


6 to 7 
4 to 5 
3 to 4 


-$84,000,000 
11,000,000 
89,000,000 


Aug 28 
Nov 13 
Dec 18 


f to li 

1 to 3 

2 to 4i 


3 to 3f 
3ito 4 
3i to 4 


$104,800,000 
75,000,000 
53,000,000 



270 MONEY MADE IN SECUEITY INVESTMENTS 



1909 



Week 
Ending 


Call 
Loans 


Time 
Loans 


Surplus 
Deposits 


Week 
Ending 


Call 
Loans 


Time 
Loans 


Surplus 
Deposits 


Jan 22 
Apr 9 
Jul 2 


l£to 2 
H to 2 
If to 2 


3 to 3-J 
2f to 3f 
2f to 3f 


$82,700,000 
43,800,000 
79,100,000 


Oct 29 
Dec 3 
Dec 31 


3 to 4| 

4 to 6 
4£ to 7 


4f to 5 

4£ to 4f 

4i 


Parity 

-$24,000,000 

-22,900,000 



1910 



Week 
Ending 


Call 
Loans 


Time 
Loans 


Surplus 
Deposits 


Week 
Ending 


CaU 
Loans 


Time 
Loans 


Surplus 
Deposits 


Jan 28 
Apr 29 
Jul 1 


If to Si 
2£ to 7 
2i to 3£ 


4 to4J 
4£to 5 
Si to 4£ 


$22,300,000 
-22,900,000 
-17,200,000 


Jul 8 
Aug 19 
Nov 11 


2 to Si 
1 to If 
2i to 4f 


4Jto 5 
4 to 4f 
4£ to 4f 


-$23,400,000 

37,000,000 

-40,300,000 



1911 



Week 
Ending 


Call 
Loans 


Time 
Loans 


Surplus 
Deposits 


Week 
Ending 


Call 
Loans 


Tim© 
Loans 


Surplus 
Deposits 


Jan 6 
Feb 25 
Apr 29 


2£to 6 
If to 2f 

2 to 2i 


3f to 4 
3 to 3f 
2f to 4 


-$24,800,000 
41,500,000 
57,200,000 


Jun 24 
Aug 25 
Dec 9 


2 to 2i 
If to 2i 
4 to 5J 


2f to 3f 
Si to 3f 
4 to 4i 


$67,900,000 

46,500,000 

-14,900,000 



1912 



Week 
Ending 


Call 
Loans 


Time 
Loans 


Surplus 
Deposits 


Week 
Ending 


Call 
Loans 


Time 
Loans 


Surplus 
Deposits 


Feb 3 

Apr 13 
Jun 15 


If to 2f 
3 to 4 
2 to 3 


3 to 4 
3£to 4 
3 to 4 


$76,800,000 
16,700,000 
57,500,000 


Aug 24 
Nov 30 
Dec 7 


2£ to 3 
3 to 20 
3 to 16 


4£ to 4f 
5£to 6 
5f to 6 


$36,100,000 
-26,200,000 
-31,900,000 



1913 



Week 
Ending 


Call 
Loans 


Time 
Loans 


Surplus 
Deposits 


Week 
Ending 


Call 
Loans 


Time 
Loans 


Surplus 
Deposits 


Jan 24 
Mch22 
Apr 4 
Jun 27 


2 to 3 
2* to 6 
2£ to 7 
1 to 2i 


4 to4£ 
5i to 5f 
4 to4* 
44. to 5* 


$28,971,000 

-11,285,000 

-7,557,000 

25,176,000 


Oct 31 

Nov 8 
Nov 28 
Dec 6 


21 to 10 
2 to 6 
2f to 10 
2£to 8 


4f to 5-} 

4f to 5 

4f to 5 

5 


-$19,546,000 
-21,732,000 
-18,277,000 
-30,347,000 









1914 








Week 
Ending 


Call 
Loans 


Time 
Loans 


Surplus 
Deposits 


Week 
Ending 


CaU 
Loans 


Time 
Loans 


Surplus 
Deposits 


Jan 3 
Feb 21 
Jun 6 
Jul 25 


4£ to 10 

If to 2 
l£to 2 
If to 2£ 


4£to 5 
3 to 3£ 

2^ to 3 
3£ to 4£ 


-$15,500,000 
63,900,000 
98,800,000 
47,900,000 


Aug 7 
Sep 5 
Oct 10 
Dec 26 


6 to 8 
6 to 8 
6 to 8 
2£ to 3 


6 to 7 
6 to 8 
6 to 8 
3f to 4 


-$10,900,000 

-107,700,000 

-108,600,000 

28,300,000 



SUEPLUS DEPOSITS AND INTEEEST EATES 871 



1915 



Week 
Ending 


Call 
Loans 


Time 
Loans 


Jan 9 
Apr 21 
May 8 
Jun 26 


2 to 3 
If to 2J 
If to 2i 
lito 2 


3£to 4 
3J to di 
3 to 3* 
2f to 3i 



Surplus 
Deposits 



-$ 9,300,000 

111,800,000 

90,400,000 

149,500,000 



Week 
Ending 


Call 
Loans 


Time 
Loans 


Jul 10 
Sep 18 
Nov 13 
Dee 31 


l£to 2 
If to 2 
If to 2 
1* to 2i 


2f to 3£ 
3 to 3£ 
2f to 3 
2f to 3 



Surplus 
Deposits 



$111,800,000 
200,742,000 
305,277,000 
200,125.000 






INDEX 



Account, 231 

Accumulation, periods of, 171 
Adams Express, 46 
Adjustment bonds, 28, 231 
Allen, Henry, & Co., 138 
Amalgamated Copper, 80 
American Academy of Political 

Science, 69 
American Beet Sugar, 81 
American Can, 148, 150 
American Car & Foundry, 245 
American Coal Products, 150 
American Express, 46 
American Locomotive, 245 
American Smelting, 49, 81, 142, 245 
American Steel & Wire, 138 
American Sugar Eefining, 50, 53, 

146, 246 
American Telephone & Telegraph, 

105, 245 
American Tobacco, 35, 143, 144, 

145, 146 
Anaconda Copper, 245 
April, in stocks, 193 
Arbitrage, 231 
Armour, P. D., 189 
Astor family, 8, 96 
Atchison, Topeka & Santa Fe, 11, 

35, 37, 134, 135, 156, 189, 205, 

246 
Atlantic Bank, 123 
August, in stocks, 194 
Averaging, 231 

Baldwin Locomotive, 150, 246 
Baltimore & Ohio, 135, 156, 205, 245 
Banks: Cash to loans, 74, 79; clear- 
ings, 95; Federal Reserve, 72; 
loans to deposits, 74, 79; money 
for the crops, 190; reports of 
condition, 72; reserves, 74, 241; 
surplus deposits, 73, 75, 76, 140, 
262; weekly statements, 72, 75; 
weekly statements suspended, 123, 
149 



Baring, Alexander, 62 
Baring failure, 131 
Barker, Jacob, 110 
Bear on stocks, 231 
Bell, Louis V., 229 
Bethlehem Steel, 150, 247 
Big men in finance, 95 
Bill of exchange, 232 
Black Friday, 122 
Blizzard of 1888, 184 
Bolles, A. S., 109 
Bonds : Affected by 

ments, 29 ; bonded 

roads, 

on, 28 



stock move- 
debt of rail- 
29 ; convertibles, profit 
five-year average price, 



29; range of price since 1890, 
43, 44, 45; range of price since 
1902, 35; sales of, 6; safety of, 
30, 36; savings bank investments, 
33; system, correct one to follow, 
218; varieties of, 28; Vander- 
bilt 3i/ 2 s, 36 

Boston & Maine, 222 

Boston Commercial, 88 

Boston News Bureau, 88 

Boston Stock Exchange, 148 

Bourse, 232 

British Consols, 41, 42 

British defeats in South Africa, 138 

Broker, 232 

Brooklyn Rapid Transit, 35, 37, 
137, 246 

Brooklyn Union Gas, 247 

Bryan scare in politics, 135 

Bucket shop, 232 

Buffalo, Rochester & Pittsburgh, 37 

Building construction, 95 

Bulls on stocks, 232 

Burton, Theodore E., 62, 69 

Call loans, 76, 233 
Call on stocks, 233 
Calumet & Hecla, 22 
Cammack, Addison, 228 
Campaigns in stocks, 166 



273 



274 



INDEX 



Canada Southern, 37 

Canadian Car & Foundry, 150 

Canadian Pacific, 247 

Carbon Steel, 150 

Carey, Henry C, 62 

Carnegie, Andrew, 3, 4, 92, 96 

< < Cats and dogs, ' ' 233 

Central Leather, 248, 260 

Central of Georgia, 35 

Central of New Jersey, 34, 37, 125, 
153, 247 

Charts: Bonds, range of price since 
1890, 43, 44, 45; cash, loans and 
deposits of New York banks, 79; 
conditions and the stock market, 
98; course of Cycles, 58; grain 
production in the United States, 
65; range of price of 20 rails 
since 1860 inclusive, 153; range 
of price of 6 market leaders, 174; 
trading markets, 174; value of, 
172 

Chesapeake & Ohio, 35, 37, 156, 247 

Chicago & Alton, 153, 248 

Chicago & Eastern Illinois, 37 

Chicago & North Western, 38, 123, 
142, 153, 156, 248 

Chicago, Burlington & Quincy, 37, 
153 

Chicago, Milwaukee & St. Paul, 11, 
28, 37, 84, 131, 142, 156, 178, 
184, 213, 248 

Chicago, Eock Island & Pacific, 38, 
153 

Clark, Dr. Hyde, 62 

Clearing house, 233 

Clearing house certificates, 117, 118, 
119, 124, 129, 131, 133, 142, 149, 
234 

Clement, Jules, 62 

C, C, C. & St. L., 38, 153, 248 

Cleveland, President, 132, 135 

Cleveland & Pittsburgh, 153 

Cleveland & Toledo, 153 

Clews, Henry, 68 

Coal roads, 234 

Colorado Fuel, 249 

Colorado Industrial, 35 

Commercial paper, 76 

Commission of a broker, 234 

Commodities clause, 141, 144 

Community of interest, 136 

Competition and its effects, 92 

Conant, Charles A., 62 

Consolidated Gas, 35, 249 

Contango, 234 



Continental Can, 150 

Cooke, Jay & Co., 124 

Corn Products Refining, 148, 249 

Corners in stocks, 119, 122, 123, 138, 
234 

Corporation tax law, 145 

Cotton, 63, 86, 147 

Course of the stock market since 
1860, 153 

Covering, 235 

Coxey's army, 134 

Credit Mobilier, 124, 137 

Crises, 101; of 1791-2, 108; of 
1814, 108; of 1818, 110; of 1826, 
110; of 1837, 111; of 1848, 113; 
of 1857, 115; of 1864, 118; of 
1873, 121; of 1884, 126; of 1893, 
130, 263, 267; of 1903, 136, 175, 
264, 269; of 1907, 141, 176, 265, 
269; of 1914, 147, 266, 270 

Crocker, Charles, 8 

Crops: As an economic factor, 85; 
bumper harvests, 121, 135, 136, 
141, 147, 151; circumstances of 
the harvest, influence of Cycles, 
63; magnitude of, 85, 121; money 
to finance the harvest, 190; re- 
ports of condition, 87; shortage 
of, 64, 112, 128, 134, 138, 143, 
189, 208; sun spots and cotton, 64 

Crowell, Frank, 69 

Crucible Steel, 150, 249 

Culminations of bear markets, 167 

Culminations of bull markets, 169 

Cycles, their length and stages, 55 

Dean, E. S., Co., 137 

December, in stocks, 195 

Delaware & Hudson, 18, 35, 38, 119, 

121, 142, 153, 156, 170, 178, 249 
Delaware, Lackawanna & Western, 

11, 38, 46, 153, 244, 250 
De Lesseps, Ferdinand, 102 
Distribution, periods of, 172, 177, 

178 
Domestic exchange, 235 
Domestic trade, 87 
Drew, Daniel, 227, 228, 229 
Driggs-Seabury, 150 
Dull days in stocks, 180 

Earnings, 80 
Electric Boat, 150 

Erie, 35, 38, 114, 115, 116, 119, 123, 
133, 153, 156, 205, 250 



INDEX 



275 



Failures and bankruptcies, 95, 133 

Fall reaction in stocks, 190 

Fall rise in stocks, 187 

Famine and plenty, 62 

February, in stocks, 193 

Federal Mining & Smelting, 250 

Federal Eeserve Banks, 235 

Field, Jacob, 229 

Field, Marshall, 3 

Finance bills, 236 

Financial: Financial Chronicle, 30, 
88; Financial Beview, 30; news- 
papers, 30, 88 ; terms and phrases, 
231 

Fisher, Prof. Irving, 97 

Five-year average plan, 199 

Flat, 236 

Flower, Eoswell P., 137 

Foreign exchange, 236 

Foreign trade, 88, 108, 109, 111, 
112, 113, 115, 116, 119, 121, 136, 
139, 145, 149, 151 

Fractional lot, 237 

Franklin Bank, 110 

Franklin, Benjamin, 60 

Friek, Henry C, 3, 53, 96, 161 

Fundamental economic factors, 70 

Garfield, President, 127 

Gates, John W., 72, 96, 138, 179 

General Chemical, 250 

General Electric, 170, 251 

General Motors, 150, 251 

Gentlemen's agreement, 131 

Giving up, 237 

Gold: Exports and imports, 108, 
119, 123, 127, 133, 135; premium 
on, 119, 122; discovery of, 94, 
114; production, 26, 94; run on 
the Treasury, 134 

Gould, Jay, 8, 127, 128, 132, 165, 
227, 230 

Government ownership, 100 

Grain crops, 65 

Grand Trunk, 46 

Granger laws, 125 

Granger roads, 237 

Grant & Ward, 129 

Grant, President, 124, 129 

Great Northern, 142, 156, 178, 244, 
251 

Great Northern Ore, 46, 142 

Greenleaf, on evidence, 201 

Half share stocks, 46 
Hamilton, Alexander, 108 



Harlem Railroad, 46, 119 
Harriman, E. H., 9, 72, 96, 139, 144, 

161, 178 
Hill, James J., 139, 140, 230 
Holcombe, Professor, 101 
Holding the bag, 237 
Holmes, Oliver Wendell, 228 
Hot winds in Kansas, 189 
Hudson Eiver E. E., 122, 153 
Huntington, C. P., 8 
Hyndman, M., 62, 68 

Idle freight cars, 95 

Illinois Central, 38, 116, 153, 156, 
251 

Income yield of stocks, 176, 177, 178 

Index numbers, 95, 97 

Inspiration Copper, 28 

Interest rates: In early times, 23; 
effect of gold production, 26; for- 
eign, 23; legal, in the States, 24; 
on time loans, 25 

International Mercantile Marine, 
103 

International Paper, 251 

Inter-State Commerce Commission, 
67, 92, 130, 146, 150 

Investment defined, 157; possibil- 
ities of, 161 

Iron Age, 88 

Iron Trade Beview, 88 

Ives, Henry S., 131 

Jackson, President, 111, 112 
January disbursements, 203 
January, in stocks, 193 
Jevons, Prof. W. S., 56, 62, 69 
Johnson, Prof. Joseph F., 26 
Jones, Prof. Edward D., 68 
Josephs, J. L. & S., 112 
Journal of Commerce, 88 
July, in stocks, 194 
July disbursements, 203 
June, in stocks, 194 

Kaffirs, 237 

Keene, James E., 129, 131, 132, 165, 

228 
Kennecott Copper, 28, 46 

Labor conditions, 95 
Lackawanna Steel, 35, 150, 252 
Lamb, 237 

Landis, Judge Kenesaw M., 143 
Lauck, Wm. Jett, 68 



276 



INDEX 



Lawson, Thomas W., 137, 179, 228 

Legal tender, 238 

Lehigh Valley, 103, 156, 244, 252 

Li Hung Chang, 4 

Lincoln, President, 117, 120 

Little, Jacob, 115 

London Punch, 226 

Long Island, 38, 46, 244 

Long of stocks, 238 

Long pull trader, rules for, 224 

Louisville & Nashville, 39, 156, 252 

McKinley, President, 135, 138 

McLeod, A. A., 133 

Machiavelli, 3 

Mackay Companies, 252 

Mackay, John W., 3 

Madison, President, 108 

Manipulation, 238 

March, in stocks, 193 

Margins on stocks, 12, 171, 224, 239 

Marine Bank, 129 

Massachusetts Lighting, 46 

Matched orders, 170 

Maxims of Wall Street, 227 

Maxwell Motor, 150 

May, in stocks, 194 

Merchants' Exchange, 18 

Metropolitan Bank, 129 

Metropolitan Street Eailway, 93 

Mexican Petroleum, 252 

Michigan Central, 119, 153 

Michigan Southern, 116, 153 

Midvale Steel, 150 

Mill, John Stuart, 62 

Millionaires in the United States, 

4 19 
Mills, D. O., 9 

Milwaukee & Prairie du Chien, 153 
Minimum prices, 148 
Minneapolis & St. Louis, 39 
Minneapolis, St. Paul & S. S. M., 253 
Missouri, Kansas & Texas, 156, 253 
Missouri Pacific, 81, 170, 222, 253 
Mitchell, W. C, 69 
Money: In circulation, 72, 95; 
. stringency, as an economic factor, 

71 
Months of the year, traits of, 193 
Moore, H. L., 62, 69 
Moratorium, 239 
Morgan-Belmont syndicate, 135 
Morgan, J. P., 3, 4, 9, 95, 131, 139, 

230 
Morse, Anthony W., 119 



Morus multicaulis, 111 
Munsey, Frank A., 161 

Nashville, Chatt. & St. Louis, 255 

National Biscuit, 253 

National Cordage, 133 

National Lead, 253 

National Monetary Commission, 69 

National Tube, 92 

New Street market, 149 

New York Air Brake, 254 

New York & New England, 134 

New York Central, 10, 39, 93, 122, 

130, 153, 156, 254 
New York, Chicago & St. Louis, 39, 

124, 254 
New York Gas Light, 18 
New York Midland, 124 
New York, New Haven & Hartford, 

156, 222, 254 
New York, Ontario & Western, 254 
New York Produce Exchange Trust 

Co., 138 
New York Stock Exchange: Closed, 

124, 137, 148 ; sales at, 6, 18, 129, 

137, 181; listed at, 11, 32; wishes 

quarterly reports, 50 
New York Tribune, 4 
New York Warehouse Co., 124 
Niles's Register, 16 
Norfolk & Western, 11, 39, 156, 255 
Normal yearly movements of prices, 

186 
North American, 255 
Northern Pacific, 124, 134, 135, 138, 

139, 142, 156, 205, 244, 255 
Northern Securities, 140 
November, in stocks, 195 
Noyes, Alexander D., 69 

October, in stocks, 195 

Ohio Life Insurance & Trust Co., 116 

Overend, Gurney & Co., 121 

Pacific Mail, 93, 256 
Panama Canal, 93, 102 
Panama Eailroad, 93 
Panics: See "Crises" and 

" Cycles" 
Paper money: contraction, 109, 120; 

inflation, 118, 124 
Par values of stocks, 46 
Parity, 239 
Peabody, George, 3, 9 
Pennsylvania Co., 39 



INDEX 



277 



Pennsylvania Railroad, 20, 39, 46, 

156, 244, 256 
People's Gas, 137, 170, 256 
Petroleum, 117 
Petty, Sir William, 62 
Pig iron production, 113, 124, 126, 

173 
Pittsburgh, Cin., Ch. & St. L., 255 
Pittsburgh Coal, 256 
Pittsburgh, Fort Wayne & Chicago, 

119, 153 
Point in stocks, 239 
Pool, 240 

Populists of Kansas, 4 
Pressed Steel Car, 256 
Prosperity, crises and depression, 

107 
Pullman, 167, 257 
Puts, 240 
Pyramiding in speculation, 240 

Eailroads: Building, 111, 113, 115, 
117, 121, 124, 126, 130, 134; bur- 
dens on, 143 ; capitalization, 20, 
29; commodities clause, 141, 144; 
dawn of construction, 7, 26; 
earnings, reports of, 84; Elkins 
law, 67, 140; features subject to 
regulation, 83 ; " gentlemen 's 
agreement,' ' 131; granger laws, 
125; Government ownership, 103; 
Hepburn law, 67, 141, 144; inter- 
state commerce laws, 130, 145; 
regulation, 66, 83, 145 ; rate wars, 
125, 128, 129; rate advances, 
150; trans-Missouri decision, 137; 
two-cents-a-mile laws, 143; Sher- 
man law, 131; valuation, 103; 
Wickersham 's midnight injunc- 
tion, 145 

Reading, 12, 39, 46, 53, 125, 127, 
133, 134, 135, 142, 144, 153, 156, 
205, 244, 257 

Receiverships, 116, 124, 125, 127 

Reid, Daniel G., 96, 178 

Republic Iron & Steel, 257 

Reserves: See " Banks' ' 

Resumption of specie payments, 124 

' ' Rich man 's panic, ' ' 140 

Richmond & Danville, 39 

Ripley, Edward P., 189 

Roberts, George H., 94 

Rockefeller, John D., 4, 96 

Rockefeller, John D., Jr., 53 

Rockefeller, William, 188 

Rock Island, 178, 257 



Rodbertus, J. K., 62, 69 

Rogers, Henry H., 53, 229 

Rome, Watertown & Ogdensburgh, 

40 
Roosevelt, President, 139, 143 
Rothschilds, 9, 112, 209, 224, 230 
' ' Rule of reason, ' ' 146 

St. Louis & San Francisco, 34, 40 

St. Louis Southwestern, 35, 257 

San Francisco earthquake, 179 

Schiff, Jacob H., 142 

Schwab, Charles M., 3 

Seaboard Air Line, 35, 258 

Seasonal swings in prices, 186 

Seligman, Prof. Edwin R. A., 69 

September, in stocks, 195 

Sherman anti-trust law, 131 

Shipping, American, 103, 114, 115 

Short of stocks, 241 

Silver Purchase act, 131, 134, 181 

Sloss-Sheffield, 258 

Smith, Adam, 83 

Smith, George Stuart, 230, 237 

Soetbeer, Dr. Adolph, 94 

Southern Pacific, 35, 40, 144, 156, 
170, 244, 258 

Southern Railway, 40, 156, 170, 258 

Specie payments: Resumption of, 
124; suspension of, 108, 112 

Speculation: Correct system to fol- 
low, 220; petty, discouraged, 6; 
inevitable, 6; defined, 158; pos- 
sibilities of, 161 

Sprague, O. M. W., 69 

Spreads and straddles, 242 

Spring reaction in stocks, 190 

Spring rise in stocks, 187 

Standard Oil, 22, 72, 92, 143, 145, 
146, 150, 258 

Stanford, Leland, 8 

Statistical knowledge, desirable, 84, 
197 

Stedman, Edmund C, 18, 110 

Stewart, A. T., 32 

Stewart, John A., 96 

Stock exchanges, 17 

Stocks : Par values, 46 ; varieties of, 
46; their values, 48; course of 
price of, 79, 98, 153, 244; sales 
of, 95 

Stop-loss orders, 225, 242 

Strikes, 126, 130, 134, 139 

Stuart, J. C, 83 

Studebaker, 150, 259 

Submarine Boat, 46 



278 



INDEX 



Subway in New York, 93 

Sun spots, 63 

Surplus deposits, 73, 75, 76, 140, 262 

Surplus reserves, 74, 242 

System, a correct one to follow, 217 

Taft, President, 103, 144 

Tariff laws: As an economic factor, 
64, 89; of 1792 and 1794, 108; 
of 1816, 109; of 1824, 110; of 
1828, 110; of 1833 (Clay Com- 
promise), 89, 111; of 1842, 113; 
of 1846 (Walker), 113; of 1857 
(Guthrie), 115; of 1861 (Mor- 
rill), 91, 117; of 1870 (Schenck), 
123; of 1872 (Dawes), 91, 123; 
of 1875, 91, 125; of 1883 (Tariff 
Commission), 91, 128; of 1890 
(McKinley), 91, 132; of 1894 
(Wilson), 91, 134; of 1897 (Ding- 
ley), 91, 136; of 1909 (Payne), 
89, 92, 145; of 1913 (Under- 
wood), 92, 148 

Taylor, Moses, 8 

Technical conditions, 243 

Telegraph service in Europe, 101 

Telephone, in Europe, 101 

Texas & Pacific, 40, 259 

Texas Company, 259 

Third Avenue, 259 

Trading markets, 172 

Trans-Missouri decision, 137 

Trusts, Federal campaign against, 
143, 145, 146 

Turning points in the market, 163 

"Undigested securities, ' ' 138 
Union Pacific, 9, 12, 28, 40, 50, 53, 
80, 93, 129, 134, 135, 144, 156, 
184, 198, 205, 211, 244, 259 
United States Bank, 16, 108, 109, 
111, 112 



United States Industrial Alcohol, 

150, 260 
United States Leather, 260 
United States Kubber, 259 
United States Steel, 19, 20, 40, 50, 

52, 80, 144, 147, 150, 165, 167, 

184, 197, 212, 244, 260 

Vail, Theodore N., 105 
Valuation of railroad lines, 103 
Vanderbilt, Cornelius, 8, 96, 119, 

125, 165, 229 
Vanderbilt, William H., 96, 128, 130 
Vanderlip, Frank A., 94, 142 
Venezuelan message, 135 
Villard, Henry, 129 
Virginia-Carolina Chemical, 261 

Wabash Eailroad, 40, 222, 261 

Wall Street Journal, 88 

Wars: Balkan, 147; Civil War, 
U. S., 117; Crimean, 115; in 
South Africa, 138;, of 1812 with 
England, 108; with Mexico, 113; 
with Spain, 137; in Europe, 1914, 
147 

Washed sales, 170, 243 

Washington, city of, captured, 108 

Washington, George, 15 

Wealth: Adam Smith's "Wealth of 
Nations," 83; of the United 
States, 18; annual increase of, 5 

West Shore, 93, 130 

Western Union, 40, 261 

Westinghouse Electric, 142, 150, 
244, 261 

Wheeling & Lake Erie, 40 

When to buy, 196 

When to sell, 207 

White, S. V., 133, 228 

Wild cat stocks, 243 

Willys-Overland, 150, 261 

Wilson, President, 101, 148 



OFFICE OF 

HENRY HALL 

AUTHOR OF 

how money is made in security investments' 
52 Broadway, New York 



Scientific Forecasts as to Stocks, Bonds, 
and Underlying Conditions 



Conditions 

110 , 

109"* 

108 

107"* 

106 

105^- 

104 

103 

102 

101 

100 

99 

98^ 

97 

96 

95 

94 

93 

92 

91 

90 — 

89 

88^ 

87 



Money and Business 



March 9, 1907, top of business boom, just 
before the Panic of 1907. 

Top of January, 1906, and conditions on 
December 31, 1915, being high point 
in 1915. 

January, 1913, end of business revival 
after "Wilson's election as President. 



July, 1914, just before the War in Europe. 



Q 3 

O Banks, Bond Houses, 
Trustees of Estates, and 
persons devoted to profita- 
ble operations in securities 
in almost every State of 
the Union have been em- 
ploying the undersigned to 
report upon the intrinsic 
value and future prospects 
of Stocks and Bonds. Manu- 
facturers, merchants, law- 
yers, physicians, dentists, 
and business and profes- 
sional men generally, have 
also been employing the au- 
thor to report upon the 
trend of Fundamental Con- 
ditions. For all of his cor- 
respondents, he has aimed 
to forecast the coming ma- 
jor fluctuations in both 
Business and Securities. 
Well grounded for these 
tasks in previous educa- 
tion and intimate and ex- 
tensive knowledge of the 
history of Cycles, Finance, 
Trade, Manufacturing, 

Banking and Railroad de- 
velopment in this country 
and in later most arduous 
investigations as to all those 
subjects, the undersigned 
has made this business his 
life work since 1906 and 
has had the good fortune 
to foretell, for the benefit of his employers and with substantial accuracy, all the great 
movements in general business and securities, as well as the majority of all the tempo- 
rary reactions and booms, since 1906. 

It was the publication of the first edition of "How Money is Made in Security In- 
vestments" in 1906, which led the undersigned to undertake his present occupation. 
The book brought to the author a voluminous correspondence from buyers in practi- 
cally every State in the Union and from some parts of Europe, each letter containing 
a request for information as to the value and prospects of the security investments of 
the writer thereof. The labor of preparing intelligent and useful replies to this vast 
mass of inquiries finally drove the author to demand a fee for his services, and led 
him, without previous intention, to become the professional consultant of financial in- 
stitutions, of a large number of men of wealth, and of other persons, men and women, 
who had a certain amount of capital, which they wished to employ conservatively and 
profitably for ineome; for safety of capital; and for increment to original capital, if 
conditions promised the latter. 



February, 1908, end of the depression after 
the Panic of 1907. 



December, 1914, low point of the depres- 
sion, heaviest depression since the 
83| of January, 1894, following the 
Panic of 1893. 



From the beginning, it became apparent that the author must decide at once, whether 
he would help "play the game" for predatory interests in Wall Street, or devote him- 
self exclusively to the advantage of his correspondents. He chose the latter course; 
and he is able to say truthfully and without reserve, that he has never had any busi- 
ness relations with, nor placed himself under the influence of, any of those perfidi- 
ous interests, which prey upon the public or seek to exploit the Security Markets 
for their own advantage and to the undoing of the owners of private capital. His 
labors are, and always have been, devoted exclusively to the pecuniary advantage of 
his clients. 

Young men, professional men, and others at the outset of their careers as investors, 
and before they have gained experience, need protection against the wiles of unscrupu- 
lous manipulators of the security markets. But they are, by no means, the only ones. 
Many of the clients of the undersigned are men of large means, whose names would be 
recognized, if it were proper to publish them, as successful leaders in industry and 
trade. Through intercourse and correspondence with hundreds of such men, a singu- 
lar fact has come to light. Only too often, men of distinct sagacity and ability, whose 
energy and self-reliance have enabled them to make fortunes in their respective voca- 
tions, overlook some vital fact or betray a lack of full knowledge in making their choice 
of securities and especially in the prices which they pay for Stocks and Bonds. The 
tendency is to buy at the top, during booms and periods of prosperity and excitement, 
which leaves the investor in a position, where he is never able to extricate his invested 
capital without serious loss. Or, he takes fright, and sells out, at the precise time 
when he should invest. The explanation is, of course, that every man in these times 
is a specialist. The person who devotes his life, wholly and successfully, to the manu- 
facture or sale of high grade steel, or glass, or textile goods, or the mining of metals, 
is frequently compelled by the stress of competition and the other exigencies of business 
to neglect the study of those influences, which affect the future value of securities. 
The study of conditions and securities is of itself a sufficient life work for any man. 
These circumstances create a field of considerable usefulness for an honest and compe- 
tent specialist in security values. Every one, who is wholly engrossed in practical 
business or a profession, will therefore find it advantageous to supplement his own in- 
formation, and correct his own judgment, by obtaining whatever facts and suggestions 
can be supplied by a capable and honest specialist in security values, before he invests 
his money in securities. For the benefit of all such persons, the author has established 
a Market Service, which will be described in detail to those who make application for 
the facts. 

The spirit and aim of the Market Service referred to is efficiency in the management 
of capital, invested or placed at risk in securities. A long study of the methods and 
practices of both the successful and the unsuccessful in Investment and Speculation, 
and of the men who make a business of manipulating the Market, enables the author 
to guide the possessors of capital by means of that Market Service to a course which, 
if followed, will secure the results mentioned in Chapter I of this book. 

The Security Markets are never stationary for more than a week or a month at a 
time. At all other times, prices are in motion, up or down. Standard Stocks com- 
monly change in value from $20 to $50 each per share in the course of every year. 
These fluctuations occur, regularly, whether you, as possessor of surplus capital, take 
advantage of them or not. They can be taken advantage of by you, if properly guided 
or if you have had sufficient experience. Yet the course of procedure of only too many 
of the persons who enter the Stock Market is absolutely unscientific and detrimental. 
The writer claims to be one of the best informed specialists in the United States with 
respect to four fundamental matters, to wit: 

Buying the right securities. 

Buying at the right time. 

Ability to tell how far the Market will go when it starts up or down. 

Judgment when to sell in order to conserve capital and profits. 

Upon another page is set forth a diagram, which exhibits the high and low prices, by 
weeks (on average), of the six actual leaders of the Stock Market since 1906 inclu- 
sive. These leaders are Union Pacific, Reading, Southern Pacific, Anaconda Copper 
(formerly Amalgamated Copper), United States Steel, and American Smelting. The 
ability of this office to select the moments, at which to buy and sell, is illustrated by 
the fact that all the important turns in prices were predicted in the author's Market 
Service at the dates, printed in the diagram. In 1907, no effort was made to call any 
of the transient turns in prices, until final culmination of the long Panic. 

You are invited to correspond with this office. 

HENRY HALL, 
52 Broadway, New York City. 






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